Breaking: US Core PCE inflation softens to 4.1% vs. 4.2% expected


Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3% on a yearly basis in June from 3.8% in May, the US Bureau of Economic Analysis reported on Friday. This reading came in below the market expectation of 3.1%.

Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, arrived at 4.1% on a yearly basis, down from 4.6% in May and below the market forecast of 4.2%. 

On a monthly basis, PCE Price Index and Core PCE Price Index both rose 0.2%.

Further details of the publication revealed that Personal Income and Personal Spending increased 0.3% and 0.5%, respectively.

Market reaction

These data don't seem to be having a noticeable impact on the US Dollar's performance against its major rivals. At the time of press, the US Dollar Index was down 0.2% on the day at 101.50.

In the meantime, US stock index futures are up between 0.5% and 1% after the data, pointing to a bullish opening in Wall Street. 

This section below was published as a preview of the US PCE inflation report at 07:00 GMT.

  • Core Personal Consumption Expenditures Price Index is set to rise 0.2% MoM and 4.2% YoY in June.
  • The Federal Reserve left doors open for more rate hikes but Powell stressed data-dependency.
  • US Dollar could see a meaningful recovery on hot PCE inflation data.

The Bureau of Economic Analysis (BEA) will publish the US Federal Reserve’s (Fed) favored inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, on Friday, July 28 at 12:30 GMT.

What to expect in the Federal Reserve’s preferred PCE inflation report?

Personal Consumption Expenditures Price Index, excluding food and energy, is likely to edge higher by 0.2% in June when compared to a 0.3% increase in May. The annual Core PCE Price Index for June is seen rising 4.2% vs. the 4.6% growth reported previously.

Meanwhile, the headline Personal Consumption Expenditures Price Index is expected to drop 0.1% MoM in June after easing to its slowest pace in more than two years in May. The annual PCE figure is expected to rise 3.1%, at a slower pace than May’s increase of 3.8%.

Back in May, the details of the report showed that “consumer spending, adjusted for prices, was little changed after a downwardly revised 0.2% gain in April. From February through May, household spending has essentially stalled after an early-year surge. Spending on merchandise dropped, while outlays for services increased,” according to Bloomberg.

The Fed watches the headline number, officials have said repeatedly that core PCE usually provides a better long-term indicator of where inflation is headed because it strips out prices that can be volatile over shorter time periods.

Heading into the June PCE release, investors are digesting the US Federal Reserve’s dovish policy outlook at its July meeting. The Fed raised rates by the widely expected 25 basis points (bps) to a 22-year high of 5.25%-5.50% and left doors open for more tightening without committing to the timing of the next lift-off. Powell refrained from providing any forward guidance, emphasizing a ‘data-dependent’ and ‘meeting-by-meeting’ approach.

Commenting on cooling infation, during his post-policy meeting press conference, Powell said the latest report could be a one-off. He stressed that "if we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point.”

Strategists at BBH offered their expectations on the upcoming inflation report, noting that “June core PCE Friday will be important. Headline is expected at 3.0% y/y vs. 3.8% in May, while core is expected at 4.2% y/y vs. 4.6% in May. Of note, the Cleveland Fed’s inflation Nowcast sees the two at 3.0% y/y and 4.2% y/y, respectively and right at consensus.”

“However, its model suggests both PCE measures will accelerate in July to 3.4% y/y and 4.5% y/y, respectively. Personal income and spending will be reported at the same time.  Income is expected at 0.5% m/m while spending is expected at 0.4% m/m. Real personal spending is expected at 0.3% m/m,” the analysts said.

When will be the Personal Consumption Expenditures Price Index report released and how could it affect EUR/USD?

The PCE Inflation report is slated for release at 12:30 GMT, on July 28. Following the dovish Fed and strong US economic data, the US Dollar clings to recovery gains, keeping EUR/USD in weekly lows on the 1.0900 level.. Markets continue pricing a probability of 22% and 30% for rate hikes by the Fed in September and November respectively.

The United States economy surprisingly accelerated to a 2.4% annual growth rate in the June quarter vs. 1.8% expected and a 2.0% growth recorded in the first quarter. According to the US Department of Commerce, in seasonally adjusted term Durable Goods Orders jumped 4.7% on a monthly basis to reach $302.5bn. Meanwhile, the latest data published by the US Department of Labor (DOL) showed that Initial Jobless Claims decreased by 7,000 to 221,000 in the week ending July 22. 

The US Dollar could extend its weekly gains in case the monthly Core PCE inflation surpasses the expected 0.2% increase in the reported period. Hot inflation data could strengthen bets for a September rate increase by the Fed. On the other hand, softer-than-expected inflation figures are likely to renew the downside in the Greenback.

FXStreet Analyst Dhwani Mehta offers a brief technical outlook for EUR/USD and explains: “Having breached the critical 21-day Simple Moving Average (SMA) on a daily closing basis on Thursday, Euro sellers are extending control heading toward the US PCE Inflation data release. The 14-day Relative Strength Index (RSI) on the daily chart is sitting below the 50 level, adding credence to the bearish bias.”

Dhwani also highlights the important technical levels for EUR/USD: “On the downside, initial technical support is seen at the confluence of the 50 and 100 DMAs near 1.0910.. A daily close below that level could intensify selling pressure, fuelling a fresh downtrend toward the July 6 low of 1.0833.”

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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