US Core PCE Preview: One step closer to the Fed's holy grail
|- The Core PCE is the Fed's favorite measure of inflation.
- The release is expected to show a level of 1.9%, but also 2.0% is possible.
- The US Dollar is well positioned to take advantage of the event.
The Core Personal Consumption Expenditure Index is published on Friday, June 29th, at 12:30 GMT. The Fed relies on this specific measure of core inflation rather than the more standard Consumer Price Index (CPI). The components of the PCE are updated more frequently.
Despite using more frequent formulae, the PCE lags the CPI in two manners. First, the CPI is published around the middle of the following month and the PCE only towards the end of the month. Secondly, the Core PCE lags behind the Core CPI in its annual gain. Back in April, the Core CPI stood at 2.1% and the Core PCE at 1.8%.
For May, we already know that the Core CPI accelerated to 2.2% YoY and therefore expectations for a tick up in the Core PCE to 1.9%. Such an outcome would put the Fed´s favorite measure of inflation just 0.1% behind the target of 2%.
It had already stood at 1.9% only in March when the Core CPI stood at 2.1%. The gap between the two figures is not always the same and squeeze once again from 0.3% to 0.2%. Therefore, an annual level of 2.0% cannot be ruled out.
Reaching the target will likely give a boost to the US Dollar. Hitting 2% core inflation is hard to achieve and the prospects of an acceleration in price rises could raise expectations for further rate hikes.
A miss of expectations and a level of 1.8% could weigh on the greenback as it will show there is still a long way to go until prices increase in a sustainable manner.
US Dollar well-positioned
If the figure comes out at 1.9% as expected, the reaction depends on other factors. The US also publishes Personal Expenditure and Personal Income at the same time, but they do not tend to move the markets too much.
The broader picture is that the US Dollar continues its steady advance. It is backed by a strong economy, a central bank that is hiking rates, and it also enjoys some back wind from Trump's trade wars, albeit not in a straightforward fashion.
All in all, an as-expected outcome could push the greenback higher.
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