š U.S. Core PCE: Inflation Signs Signal Fed Dilemma
The Federal Reserve keeps a close eye on ācoreā PCE ā the Personal Consumption Expenditures Price Index minus food and energy ā as its primary gauge of underlying inflation. On June 26, the fresh Q1 2025 Core PCE read came in at +3.5% year-over-year, notably above the forecasted 3.4% and well above the Fedās 2% target .
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?ļø May Data Snapshot
Core PCE YoY increased slightly to 2.52% in April from 2.67% in March .
Aprilās level climbed to 125.22, up from 125.08 in March ā marking a historic high in the series .
š¤ What It All Means
The Q1 spike to 3.5% YoY (from 3.4% in Q4) highlights that inflation pressures, especially in core services and housing, remain baked into the economy .
The persistent inflation above target puts the Fed in a cautious position: market expectations for a rate cut have shifted from summer to fall.
š Market and Fed Response
Investors are pricing in only a 60ā70% chance of a September rate cut, instead of earlier expectations for July .
The Federal Reserveās June 26 market announcement suggesting a higher reading than forecast also triggered a modest uptick in the U.S. dollar .
š§ The Bigger Picture
Real Q1 GDP contracted 0.2% annualized, while weekly jobless claims ticked up to 240,000, suggesting a softening economy .
Still, stubborn inflation ā notably in services and housing ā means the Federal Reserve may stay patient on cutting rates until there's sustained evidence inflation is subsiding.
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š® Looking Ahead
The next Core PCE release on June 27 will be scrutinized for signs of a downtrend toward the Fedās 2% goal.
Upcoming labor data and housing inflation metrics will also play a critical role in shaping both Fed policy and investor expectations.
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Bottom Line
Despite slight slowing in monthly inflation, Core PCE remains well above target. Inflation is proving stubborn, particularly in services and housing, keeping the Fed cautious. Markets now broadly expect rate cuts to be delayed until at least September.
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