US PCE Inflation Soars on Failed Forecasts, Weakening the Dollar

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The dollar is weakening during the US session, especially against the yen. In May, PCE inflation accelerated substantially but fell somewhat short of forecasts. Sterling, on the other hand, is the weakest mover today, extending the post-BoE selloff. Risks over the rise of coronavirus infections are also putting pressure on the Pound. Commodity currencies are the most powerful, with US futures hinting at a record-breaking run.

US personal income fell -2.0% mom, or $414.3bn in May, in line with expectations. The fall in personal income was primarily reflected in the decrease in state social benefits. Expenses decreased by -0.4% MoM, which is also in line with expectations. The overall PCE price index accelerated to 3.9% y/y from 3.6% y/y, below expectations of 4.0% y/y. The core PCE price index accelerated to 3.4% y/y. YoY vs. 3.1% YoY, falling short of expectations at 3.5% YoY.

In response to the dollar’s dip in the wake of disappointing PCE figures, the EUR/USD is now trading at new 2-day highs. However, inflation fears faded in tandem with tapering expectations after US inflation, as measured by the PCE, climbed 0.5 percent month over month in May and 3.4 percent year over year, leaving no room for upside surprises and putting the dollar under additional pressure.

Can the US Core PCE Prompt Fed Members To Change Their Views?

It is believed that the Core PCE in the US is the Fed’s favorite inflation measure. It covers all households and non-profit organizations serving households. Therefore, it is said that the Fed prefers this inflation rate to others.

As a reminder, at the recent FOMC meeting, “dot charts” showed that members were expecting 2 rate hikes by the end of 2023, and 7 members were expecting 1 rate hike by the end of 2022. In addition, Fed member Bullard recently said Powell opened a discussion on tapering. While today’s Core PCE print was slightly weaker than expected, it is still a strong performance.

Therefore, if this is indeed one of the Fed’s favorite inflation indicators, will today’s inflation lead to them tapering earlier than they would like? Fed members have been parading all week, discussing that high inflation is temporary. Some officials consider inflation to be more transitory than others. Today’s press shows that although inflation is high, it is not growing. It will be interesting to see if the Fed’s speech changes its tune as a result of today’s press.