Following the release of the consumer price index and producer price index this week, we are now forecasting a 0.084% increase in the May personal consumption expenditures index, translating to a 2.6% increase on a year-over-year basis.
This will appear in the forecast table as a 0.10% estimate. But we believe the risk to the forecast is tilted toward no increase in the top-line monthly index. Our core estimate is 0.148% for the month and 2.6% year over year.
Should the PCE data, which will be released on June 28, align with our forecast, it will affirm our notion that the turn-of-the-year inflation was noise and that disinflation will continue to dampen month-over-month readings, even as modest base-year effects temporarily prop up top-line year-over-year inflation readings.
A more up-to-date reading is the three-month annualized rate, which showed a sharp drop to 2.7% from 3.8% earlier.
What made the last two months different from the first three months of the year was that most of the rebound in inflation at the turn of the year came from a handful of components like shelter, car insurance, airfare and energy. Since then, energy prices have normalized, airfare is down and car insurance has improved.
Shelter, however, continues to be the bane of the inflation concern. But we are not too worried about shelter costs because housing inflation is a lagging indicator of real-time rent prices.
Using the Federal Reserve’s newly created Cleveland Fed New Tenant Index, housing inflation should normalize at the beginning of the third quarter. That also coincides with when new leases are signed normally on a yearly basis.
We are still expecting the first rate cut by the Federal Reserve in September as the economy, hiring and inflation cool.
The market is pricing in a 64.5% probability of a September rate cut with additional 25 basis point rate cuts priced in for December and January.
Read more of RSM’s insights on inflation, the economy and the middle market.
The takeaway
We are only one good inflation report away from getting back to where it was at the start of the year—feeling good about inflation and ready for rate cuts.
Encouraging inflation news in the past two months reaffirmed our call that the first-quarter inflation rebound was more noise than signal and that the market overreacted.
This continues to highlight the downside of relying on high-frequency, month-to-month data, which creates unnecessary volatility and potential policy errors, eroding the Fed’s credibility in the long run.
