US April PCE Expected to Hit Three-Year High, June High Interest Rate Maintained as Market Consensus

The market generally expects that the U.S. PCE price index for April will accelerate for the third consecutive month, with the year-on-year increase potentially reaching a three-year high, further strengthening the Federal Reserve's decision to maintain high interest rates in June.

According to FactSet's survey, economists anticipate the core PCE year-on-year increase for April to rise to 3.3%. The rebound in energy prices is the main driver, but the overall heat is likely to be less than that of CPI.

The continued rise in inflation data means that the threshold for the Federal Reserve's rate cut has been further raised. The market currently expects that most policymakers will maintain the policy interest rate range of 3.5% to 3.75% at the mid-June meeting.

Energy and AI Demand Resonance Pushes up Inflation Indicators

The main driving force behind the increase in nominal PCE in April comes from the rebound in energy and gasoline prices. This is consistent with the previously released trends of CPI and PPI, but the performance in sub-items such as medical services and portfolio management is moderate, indicating that PCE may not be too aggressive.

Since the PCE assigns a significant weight to housing assets that is much lower than that of CPI, the statistical distortion to housing data caused by the government shutdown in 2025 will not constitute a core disturbance to the overall reading in this PCE report.

In terms of core inflation, research released by the Federal Reserve this week shows that rapid construction in the AI sector in the past six months has played a role. The surge in demand for electronic components such as semiconductor chips has become a key factor supporting the resilience of core inflation.

Federal Reserve Policy Pressure and Policy Tool Disagreements

Inflation pressures are shaking policy positions within the Federal Reserve. The previously dovish governor, Waller, has recently shifted to a more hawkish stance, publicly warning that "inflation is not heading in the right direction." Waller pointed out that, based on the latest economic data, the Federal Reserve should make it clear in the next policy statement that "the possibility of future rate cuts is not higher than that of rate hikes," and the hot PCE data will reinforce this view.

Additionally, there is disagreement within the Fed on inflation indicators. Fed Chairman Wosh prefers to refer to the Dallas Fed's trimmed mean PCE index, which has remained significantly lower than the conventional readings since last August.

In response, Standard Chartered Bank's Global G10 Currency Research Head Steve Englander warned that the design of the trimmed mean indicator exaggerates deflationary pressures and currently "provides misleadingly low core inflation metrics," and the market should not rely on it too much. Citi economist Andrew Hollenhorst believed that AI measurement issues might give officials room to downplay the data. But he and his colleague Veronica Clark emphasized that in the face of the reality of inflation's resurgence, such technical downplaying operations will be "very difficult to get away with."