PCE Data Preview: Falling oil prices ease inflation, but the market may be over-pricing interest rate hike expectations.
2026-06-23 18:15:22
The May PCE price index will be released on Thursday. This indicator has long been considered the core inflation gauge for the Federal Reserve, but its policy weight is shifting. While the FOMC, under new Chairman Kevin Warsh, has raised its 2026 inflation forecast and there are significant disagreements among its members, the current state of the real economy, including energy price trends, the resilience of consumer spending, and the cyclical nature of monetary policy, supports the Fed's continued cautious, data-driven stance. Although current inflation remains above the 2% policy target, upward pressure is likely short-term and temporary, and the market's previous aggressive bets on interest rate hikes are probably an overreaction.
Warsh consistently downplays the sole decision-making weight of the traditional core PCE, placing greater emphasis on underlying inflation indicators such as the trimmed mean PCE, which eliminates extreme fluctuations. This weakens the policy impact of a single month's PCE reading, and the market should not overemphasize the guiding effect of the May PCE data.
The significant drop in oil prices provides strong support for a decline in inflation.
Brent crude oil prices are currently hovering around $77 per barrel, down nearly 20% from their previous highs. The underlying drivers include the continued easing of geopolitical tensions in the Middle East, the resumption of shipping in the Strait of Hormuz, and the easing of global oil supply constraints, significantly reducing the risk of imported inflation.
Energy costs are the main driver of short-term inflation in this round, and the benefits of declining oil prices will be transmitted through the industrial chain in the second half of the year, gradually lowering core inflation indicators. Even if the Federal Reserve maintains the current interest rate range of 3.50%-3.75%, the inflation level is expected to gradually move towards the 2% target.
The market expects a moderate recovery in US personal income and consumer spending, with monthly growth rates of approximately 0.4% and 0.6% respectively. This would alleviate the pressure on household living costs, support market demand, and avoid the risk of a continued spiral of rising prices.
Core PCE forecasts released; data reliance remains a core framework for the Federal Reserve.
The market generally predicts that the year-on-year growth rate of core PCE in May will fall within the range of 3.3%-3.4%. The overall PCE will be higher due to the base effect of energy prices. When interpreting the data, it is necessary to make a comprehensive judgment based on the downward trend of oil prices and the base effect of the same period last year.
Real-time inflation models from institutions such as the Cleveland Federal Reserve show that while overall inflation is currently high, it has not spiraled out of control. It's important to distinguish between the market's and the Federal Reserve's observation logic here:
The trading market closely monitors the traditional core PCE, regarding it as a key benchmark for whether or not interest rates will be raised. Warsh publicly criticized the traditional core PCE as merely a rough approximation, arguing that it cannot filter out one-off price disturbances such as oil prices, geopolitical factors, and tariffs. He believes that policy decisions will refer more to the truncated mean PCE, weakening the signal weight of the single-month core PCE.
The Federal Reserve raised its 2026 inflation forecast in its dot plot, and some members favored further interest rate hikes. However, significant internal divisions within the committee demonstrate that "combining multiple indicators and adjusting policy based on data" remains the core principle of the Federal Reserve, and a single PCE data point is unlikely to reverse the wait-and-see attitude.
Policy cycle perspective: Maintaining patience and waiting is better than aggressive interest rate hikes.
Monetary policy plays a role by managing expectations, adjusting the financial environment, and stabilizing demand over a complete cycle; the effect of a single large interest rate hike is very limited.
With the current supply-side shocks easing and the US economy maintaining its growth resilience, premature and excessive interest rate hikes would unnecessarily tighten the overall financial environment and damage long-term economic growth potential. Historically, oil price increases triggered by geopolitical conflicts have mostly been short-term fluctuations, and monetary policy should not respond excessively to them.
Leading investment banks such as JPMorgan Chase predict that the Federal Reserve will maintain current interest rates throughout 2026, with the first 25-basis-point rate hike not expected until 2027. These banks argue that the decline in oil prices, coupled with weak economic fundamentals and the Warsh framework's reduced weighting of the traditional PCE, are sufficient to keep the Fed in a wait-and-see mode. However, the futures market has already aggressively priced in a possible rate hike in 2026, clearly ignoring the policy buffer provided by the adjustment of the indicator framework.
Current market situation: Over-betting on interest rate hikes is pushing up the dollar and suppressing gold prices.
The market is amplifying its interpretation of Warsh's hawkish remarks and the adjustment of the dot plot, which completely adheres to the old framework and uses the traditional core PCE as the sole anchor, significantly raising expectations for interest rate hikes. Current interest rate futures pricing in a possible rate hike before the end of 2026 have driven the dollar index to a multi-week high; gold and other non-interest-bearing assets continue to face pressure, with prices experiencing consecutive corrections.
With clear signs of falling oil prices and the Federal Reserve Chairman's apparent intention to downplay the importance of the traditional PCE indicator, the current trading market is clearly overly optimistic in its bets on a tightening cycle.
If Thursday's PCE data meets or even falls short of market expectations, even a slight increase in core inflation is unlikely to trigger an emergency rate hike under the new Warsh observation framework. The market's aggressive pricing in September and October rate hikes will likely be revised: the dollar will weaken temporarily, and gold will rebound. Conversely, if the impact of rising energy prices on end-products exceeds expectations, the pace of the Fed's rate hikes will need to be reassessed. Currently, improved supply conditions, coupled with adjustments to the inflation indicator observation system, provide double support for the Fed to maintain a wait-and-see policy rather than immediately shifting to a hard tightening stance.
Investment Insights and Risk Balancing
The release of PCE data will significantly amplify volatility in the foreign exchange, commodity, and bond markets. Investors need to pay close attention to two key points: first, the details of the PCE breakdown; and second, Warsh's post-meeting remarks regarding the weighting of traditional PCE and the trimmed mean indicator, the latter having a greater impact on interest rate expectations than the monthly inflation reading. Simultaneously, investors should continue to monitor the Middle East geopolitical situation and subsequent household income and consumption data.
In the medium to long term, the combination of declining oil prices, the cyclical logic of monetary policy, and reforms to inflation monitoring indicators suggests that the Federal Reserve's policy will move towards a more balanced approach: flexibly adjusting based on multi-dimensional economic data to balance the dual goals of price stability and economic growth.
The US economy remains resilient, and while inflation risks cannot be ignored, the overall foundation for a sustained decline is in place. The optimal approach now is to view the market rationally and cautiously: while paying attention to short-term market sentiment fluctuations, one should not solely rely on traditional core PCE data to judge policy trends. An objective analysis of economic fundamentals, policy transmission logic, and changes in the Warsh-dominated inflation indicator framework is still necessary. The Fed's final policy choice will not depend entirely on Thursday's detailed PCE data but will also be considered in conjunction with alternative inflation indicators such as the cut-off mean.
Warsh consistently downplays the sole decision-making weight of the traditional core PCE, placing greater emphasis on underlying inflation indicators such as the trimmed mean PCE, which eliminates extreme fluctuations. This weakens the policy impact of a single month's PCE reading, and the market should not overemphasize the guiding effect of the May PCE data.
The significant drop in oil prices provides strong support for a decline in inflation.
Brent crude oil prices are currently hovering around $77 per barrel, down nearly 20% from their previous highs. The underlying drivers include the continued easing of geopolitical tensions in the Middle East, the resumption of shipping in the Strait of Hormuz, and the easing of global oil supply constraints, significantly reducing the risk of imported inflation.
Energy costs are the main driver of short-term inflation in this round, and the benefits of declining oil prices will be transmitted through the industrial chain in the second half of the year, gradually lowering core inflation indicators. Even if the Federal Reserve maintains the current interest rate range of 3.50%-3.75%, the inflation level is expected to gradually move towards the 2% target.
The market expects a moderate recovery in US personal income and consumer spending, with monthly growth rates of approximately 0.4% and 0.6% respectively. This would alleviate the pressure on household living costs, support market demand, and avoid the risk of a continued spiral of rising prices.
Core PCE forecasts released; data reliance remains a core framework for the Federal Reserve.
The market generally predicts that the year-on-year growth rate of core PCE in May will fall within the range of 3.3%-3.4%. The overall PCE will be higher due to the base effect of energy prices. When interpreting the data, it is necessary to make a comprehensive judgment based on the downward trend of oil prices and the base effect of the same period last year.
Real-time inflation models from institutions such as the Cleveland Federal Reserve show that while overall inflation is currently high, it has not spiraled out of control. It's important to distinguish between the market's and the Federal Reserve's observation logic here:
The trading market closely monitors the traditional core PCE, regarding it as a key benchmark for whether or not interest rates will be raised. Warsh publicly criticized the traditional core PCE as merely a rough approximation, arguing that it cannot filter out one-off price disturbances such as oil prices, geopolitical factors, and tariffs. He believes that policy decisions will refer more to the truncated mean PCE, weakening the signal weight of the single-month core PCE.
The Federal Reserve raised its 2026 inflation forecast in its dot plot, and some members favored further interest rate hikes. However, significant internal divisions within the committee demonstrate that "combining multiple indicators and adjusting policy based on data" remains the core principle of the Federal Reserve, and a single PCE data point is unlikely to reverse the wait-and-see attitude.
Policy cycle perspective: Maintaining patience and waiting is better than aggressive interest rate hikes.
Monetary policy plays a role by managing expectations, adjusting the financial environment, and stabilizing demand over a complete cycle; the effect of a single large interest rate hike is very limited.
With the current supply-side shocks easing and the US economy maintaining its growth resilience, premature and excessive interest rate hikes would unnecessarily tighten the overall financial environment and damage long-term economic growth potential. Historically, oil price increases triggered by geopolitical conflicts have mostly been short-term fluctuations, and monetary policy should not respond excessively to them.
Leading investment banks such as JPMorgan Chase predict that the Federal Reserve will maintain current interest rates throughout 2026, with the first 25-basis-point rate hike not expected until 2027. These banks argue that the decline in oil prices, coupled with weak economic fundamentals and the Warsh framework's reduced weighting of the traditional PCE, are sufficient to keep the Fed in a wait-and-see mode. However, the futures market has already aggressively priced in a possible rate hike in 2026, clearly ignoring the policy buffer provided by the adjustment of the indicator framework.
Current market situation: Over-betting on interest rate hikes is pushing up the dollar and suppressing gold prices.
The market is amplifying its interpretation of Warsh's hawkish remarks and the adjustment of the dot plot, which completely adheres to the old framework and uses the traditional core PCE as the sole anchor, significantly raising expectations for interest rate hikes. Current interest rate futures pricing in a possible rate hike before the end of 2026 have driven the dollar index to a multi-week high; gold and other non-interest-bearing assets continue to face pressure, with prices experiencing consecutive corrections.
With clear signs of falling oil prices and the Federal Reserve Chairman's apparent intention to downplay the importance of the traditional PCE indicator, the current trading market is clearly overly optimistic in its bets on a tightening cycle.
If Thursday's PCE data meets or even falls short of market expectations, even a slight increase in core inflation is unlikely to trigger an emergency rate hike under the new Warsh observation framework. The market's aggressive pricing in September and October rate hikes will likely be revised: the dollar will weaken temporarily, and gold will rebound. Conversely, if the impact of rising energy prices on end-products exceeds expectations, the pace of the Fed's rate hikes will need to be reassessed. Currently, improved supply conditions, coupled with adjustments to the inflation indicator observation system, provide double support for the Fed to maintain a wait-and-see policy rather than immediately shifting to a hard tightening stance.
Investment Insights and Risk Balancing
The release of PCE data will significantly amplify volatility in the foreign exchange, commodity, and bond markets. Investors need to pay close attention to two key points: first, the details of the PCE breakdown; and second, Warsh's post-meeting remarks regarding the weighting of traditional PCE and the trimmed mean indicator, the latter having a greater impact on interest rate expectations than the monthly inflation reading. Simultaneously, investors should continue to monitor the Middle East geopolitical situation and subsequent household income and consumption data.
In the medium to long term, the combination of declining oil prices, the cyclical logic of monetary policy, and reforms to inflation monitoring indicators suggests that the Federal Reserve's policy will move towards a more balanced approach: flexibly adjusting based on multi-dimensional economic data to balance the dual goals of price stability and economic growth.
The US economy remains resilient, and while inflation risks cannot be ignored, the overall foundation for a sustained decline is in place. The optimal approach now is to view the market rationally and cautiously: while paying attention to short-term market sentiment fluctuations, one should not solely rely on traditional core PCE data to judge policy trends. An objective analysis of economic fundamentals, policy transmission logic, and changes in the Warsh-dominated inflation indicator framework is still necessary. The Fed's final policy choice will not depend entirely on Thursday's detailed PCE data but will also be considered in conjunction with alternative inflation indicators such as the cut-off mean.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
