Summary

The Federal Reserve's favorite inflation indicator, the PCE Price Index, will be released by the BEA this morning. The index differs from the better-known Consumer Price Index (CPI) because its composition is changed more frequently and is quicker to reflect the impact of real-time pricing fluctuations. In the most recent report, PCE inflation reportedly grew 2.1% year over year through April; by comparison, the latest CPI report, through May, had inflation rising 2.4%. Core PCE, which removes volatile food and energy prices, had risen at an annual rate of 2.5% in the latest month. Our PCE forecasts call for relatively steady readings for May: 2.1% for the headline number and for 2.6% for the core reading. We think that lingering inflation in certain sticky-priced services (transportation and housing) will combine with tariff impacts to present a challenge for the Fed as it strives for its 2% goal. Inflation in this cycle peaked in summer 2022 and has been on a fairly consistent downward trek since then. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.6% rate year over year, down 10 basis points compared to the revised month-ago level. We note the numbers are volatile and distorted somewhat by swings within the volatile Producer Price Inflation report. Focusing on core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy (from the