Hotter-Then-Expected PCE Print Clouds Fed’s Next Move on Rates

The Core Personal Consumption Expenditures (PCE) Price Index. As the Federal Reserve’s preferred inflation gauge, this economic print was seen as one of the most important reports of the week.

Inflation has been a talking point throughout the year, and gained even more weight this week after the third and final revision of the U.S.’s economic performance during the first quarter revealed a sharp 0.5% contraction. Now, the Fed may be under even more pressure to lower interest rates and change its focus to economic growth. 

• Core PCE MoM: 0.2% (Forecast: 0.1%, Previous: 0.1%)
• Core PCE YoY: 2.7% (Forecast: 2.6%, Previous: 2.5%)

This data means that inflation is not only not lowering as fast as expected, but is actually rising, albeit mildly. Moreover, this was the first time the PCE ticked upward since February of this year.

That poses a real challenge for the Federal Reserve, which has repeatedly signaled that it needs “greater confidence” that inflation is sustainably trending downward before making any policy changes. Today’s hotter-than-expected Core PCE figures complicate that narrative, especially in the context of weakening economic growth.

Now, Jerome Powell is stuck between a rock and a hard place. While it is true that tariffs and foreign conflicts may be affecting American consumers, ultimately, the Fed does not and should not care about policy, as Powell repeatedly said during his last speeches.

However, the Federal Reserve is now stuck in a timeline where there is growing inflation and deteriorating economic output, an uncomfortable mix reminiscent of stagflation concerns.

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