Market focus turns to U.S. PCE Index: Will inflation surprise again?

The upcoming release of the U.S. Personal Consumption Expenditures (PCE) inflation index is shaping up to be a major market mover. With inflation lingering above target and the Fed under pressure to cut rates, this week’s data could either clear the path for policy easing—or complicate it further.

Sticky situation: Inflation seen edging higher in May

Economists expect a slight pickup in both headline and core PCE inflation for May. The core PCE, the Federal Reserve’s preferred inflation gauge, is forecast to rise to 2.6%, up from 2.5% in April, while headline PCE is expected to hit 2.3%, from 2.1%.

The figures suggest U.S. inflation remains stubbornly above target, with price pressures seemingly entrenched in the mid-to-high 2% range. For a Fed that wants confirmation of cooling inflation before cutting rates, this kind of stickiness could prove problematic.

Tariff tensions: Will trade policy fuel the next wave of inflation?

The inflation debate is increasingly being shaped by politics. New or proposed tariffs on Chinese imports, particularly under Donald Trump’s 2025 trade agenda, are adding fresh upside risks. While the full effects of these tariffs won’t be visible in May’s data, any upward pressure on prices will raise red flags for policymakers.

Still, there's a counterargument gaining traction: weak demand may be offsetting higher costs. Services inflation has cooled in recent months as consumer sentiment wanes, possibly keeping a lid on pass-through effects—for now.

Fed’s new playbook: Higher for longer on inflation?

The Fed’s latest projections acknowledged a shifting reality: core inflation could remain above 3% well into 2025. While the dot plot still indicates two rate cuts next year, the overall trajectory for interest rates has flattened, suggesting the Fed is preparing to keep policy tighter for longer.

At the same time, Chair Jerome Powell has kept the door open to earlier cuts, saying that if the data justifies it, the Fed will act. That puts extra weight on every inflation report between now and the July FOMC meeting.

Markets bet on July: One soft print could be enough

Despite the Fed’s cautious messaging, traders are creeping back into the rate-cut camp. Market pricing now reflects a roughly 25% chance of a cut in July, a number that could jump if the PCE release comes in softer than expected—especially after the benign CPI data earlier this month.


(Source: CME Group)

A downside surprise would ease fears about tariff pass-throughs and suggest inflationary momentum is fading. But a hotter-than-expected print could reignite concerns about persistent inflation and force the Fed to push back its rate-cut timeline.

Softer inflation could be the catalyst that pushes Wall Street to a record high, with the S&P 500 a fraction below that critical psychological level. It could also force the US Dollar lower again, as it tests three year lows. Meanwhile, an upside surprise would likely weigh on equity prices and give the Greenback a boost.