Income & Spending (May)

The core PCE deflator increased by only 0.08% m/m in May and, even allowing for some modest upward revisions to the gains in earlier months, that was enough to pull the annual core inflation rate down to 2.57%, from 2.78%. The breakdown was also encouraging. Despite a massive 1.3% m/m increase in hospital prices, 2% plus declines in portfolio management and air transportation prices mean that core services (ex housing) prices, aka supercore, increased by only 0.09%. There is a good chance that core PCE inflation will fall to 2.5% in June, although unfavourable base effects make a further decline in the second half of this year unlikely. Still the Fed’s median projection that core inflation will be 2.8% in the fourth quarter now looks too pessimistic.