The Federal Reserve's preferred inflation gauge, the PCE shows contrasting trends between its headline number and the core print, which excludes volatile items such as food and energy.
Headline PCE (left chart) shows a downtrend (top green arrow), with its rate of change indicating further deceleration (bottom green arrow). It moderated to 3.8% y/y, down from the previous number of 4.4%. On a monthly basis it was a low 0.1%, down from the previous months 0.4%.
However, the core PCE (right chart) shows a sideways trend (top red arrow), with its rate of change heading back towards a stagnant zero (bottom red arrow). It printed at 4.6% y/y, which was only marginally lower than the previous 4.7% y/y. Moreover, its monthly number was 0.3%, which annualises to 3.66%, still too high when compared with the Fed's 2% target.
The core PCE is likely to still bother the Fed, even though the headline number is responding to the tighter monetary policy. Following a series of 10 consecutive interest rate hikes starting from March 2022, the central bank decided to temporarily halt its actions in June. However, the bank cautioned that additional hikes will be required to reduce inflation, with the latest dot plot projections pricing in another two rate increases this year.
According to the CME FedWatch tool, market participants are factoring in an approximately 87% probability that the Federal Reserve will authorize a 0.25% raise during the July meeting. These odds remained largely unchanged after the release of today's data.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.