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Tariffs

Tariff Pressures Expected to Show Up in Inflation Numbers

Strategic Insights

— 1 min read

The Federal Reserve's preferred inflation metric is expected to show a slight increase in price pressures in May, reflecting the effects of Donald Trump's tariffs on US prices. The personal consumption expenditures (PCE) index data for May will be released on Friday, with economists forecasting a headline figure of 2.3 per cent year on year, up from 2.1 per cent in April. The core measure, which strips out volatile food and energy sectors, is expected to reach 2.6 per cent, compared with 2.5 per cent in the previous month. A bigger acceleration in price pressures could deter the Federal Reserve from cutting interest rates soon.

Key Takeaways:

  • The PCE index data for May is expected to show a headline figure of 2.3 per cent year on year, up from 2.1 per cent in April.
  • The core measure of the PCE index is expected to reach 2.6 per cent, compared with 2.5 per cent in the previous month.
  • A bigger acceleration in price pressures could deter the Federal Reserve from cutting interest rates, with traders in the futures market expecting two rate cuts this year.
  • Analysts at ING refer to the current period as the "calm before the storm" due to expected tariff-induced price hikes from July.
  • The HCOB Eurozone purchasing managers' index is expected to show an improvement in services and manufacturing sectors in June, but the improvement is not expected to be sufficient to return either sector to growth.
  • The European Central Bank has cut interest rates to 2 per cent, but took a more hawkish tone than expected about future rate cuts.
  • Weaker than expected PMI data would bolster the case for faster rate reductions.

Statistics:

  • Expected headline PCE index figure for May: 2.3 per cent year on year
  • Expected core PCE index figure for May: 2.6 per cent
  • Traders' expectations for Federal Reserve rate cuts: two cuts this year
  • ING analysts' forecast for tariff-induced price hikes: July
  • HCOB Eurozone purchasing managers' index expected reading for June (services): 50
  • HCOB Eurozone purchasing managers' index expected reading for June (manufacturing): 49.7
  • Previous month's reading (May): 49.4

Sources:

  • Economists surveyed by Bloomberg
  • Analysts at ING
  • European Central Bank
  • Bloomberg
  • Reuters
  • CNBC

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