PCE index preview: Will inflation remain sticky?

Inflation will take the spotlight on Friday, with markets awaiting the personal consumption expenditures price index data that’s due before the bell for clues on the progress of the Federal Reserve’s fight to tame inflation.

The PCE Price Index, the Fed’s preferred inflation gauge, is expected to have risen at an annual rate of 2.7% in April, the same as in March. Economists project core PCE – excluding food and energy costs – to have risen 2.8%. On a month-over-month basis, PCE and core PCE prices are expected to rise 0.3% each.

“Where the actual release lands will determine whether we are entering a new chapter for the Fed disinflation story or whether it remains trapped in the wreckage of sticky inflation,” said Chris Turner, global head of markets, ING.

Michael Kramer of Mott Capital Management, believes the PCE report is likely to set the course of monetary policy for the next 6-9 months as the Fed wants a few months of favorable data, “and at this rate, that doesn’t appear to be coming anytime soon.”

Inflation has shown signs of cooling, but at an extremely slow pace. Earlier this month, the consumer price index for April was slightly lower than expected compared to March, but remained well above the Fed’s target on a yearly basis.

On Thursday, the Commerce Department revised its Q1 GDP growth estimate, reflecting a downward revision to PCE prices for the quarter.

“We believe inflation is sticky and not stuck, but a slower pace of disinflation could end up resulting in fewer rate cuts down the road,” said Collin Martin, director of fixed income strategy, Schwab Center for Financial Research.

While markets are still divided on whether the Fed will start cutting interest rates in September or November, the consensus is that there will be no more than two cuts by the end of the year.

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