US core PCE inflation set to rise 2.9% YoY in August with Federal Reserve easing outlook in focus
- The core Personal Consumption Expenditures Price Index is forecast to rise 0.2% MoM and 2.9% YoY in August.
- Headline annual PCE inflation is seen edging higher to 2.7%.
- Markets broadly expect the Federal Reserve to cut the policy rate by 25 bps in October.
The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for August on Friday at 12:30 GMT.
The PCE index is closely watched by market participants because it is the Federal Reserve’s (Fed) preferred measure of inflation and could influence the policy outlook.
Anticipating the PCE: Insights into the Federal Reserve's key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.2% month-over-month (MoM) in August, at a slightly softer pace than the 0.3% increase recorded in July.
In 12 months to August, the core PCE inflation is set to remain unchanged at 2.9%. Meanwhile, the headline annual PCE inflation is forecast to tick up to 2.7% in this period.
Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.
While speaking in the September post-meeting press conference after lowering the policy rate by 25 basis points (bps), Fed Chair Jerome Powell said that the risk of persistent inflation from tariffs needs to be managed and assessed. Powell also shared the Fed’s forecasts for PCE inflation data, noting that the annual rate was probably 2.7% in August, and the core PCE Price Index was expected to rise 2.9%.
Previewing the PCE inflation report, TD Securities said:
“We expect core PCE prices decelerated in August to 0.19%. Headline likely picked up to 0.23% due to accelerating food and energy prices. Y/Y inflation should be 2.9% and 2.7%, respectively. Passthrough from tariffs into core goods prices continued gradually, while supercore services moderated. We forecast personal spending and income moderated to 0.4% and 0.3%, respectively.”
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar (USD) gathered strength against its major rivals following the Fed’s September policy meeting, as the revised Summary of Economic Projections (SEP) and Chair Powell’s remarks suggested that the Fed will adopt a cautious stance on further policy easing after opting for multiple rate cuts in the last quarter of the year.
Although Powell’s inflation projections are likely to limit the potential market impact of the PCE data, investors will pay close attention to the monthly core PCE figure, which holds the utmost relevance as it is not distorted by base effects. A significant upside surprise in this data, with a reading of 0.4% or higher, could trigger a USD rally and weigh on EUR/USD heading into the weekend. On the other hand, a weaker-than-forecast increase could have the opposite impact on the pair’s action.
The CME FedWatch Tool shows that markets nearly fully price in another 25 bps rate cut in October and see about a 75% chance of one more 25 bps reduction in December. PCE inflation data is unlikely to change markets’ minds about the October rate cut, but it could cause them to reassess what the US central bank could do to wrap up the year.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“EUR/USD remains within the lower half of a nine-month-old ascending regression channel, while the Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly above 50, reflecting a neutral stance in the short term.”
“On the downside, the 50-day Simple Moving Average (SMA) and the lower limit of the ascending regression channel form a pivot level at 1.1680-1.1670. In case EUR/USD confirms that level as resistance, technical sellers could take action. In this scenario, 1.1580 (100-day SMA) could be seen as the next support level before 1.1500 (round level). Looking north, the first resistance level could be spotted at 1.1870 (static level) ahead of 1.2000 (mid-point of the ascending channel, round level).”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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