Synopsis:

Goldman Sachs forecasts a modest increase in core PCE inflation for May, anticipating a rise of 0.13% month-over-month and 2.59% year-over-year. They predict a temporary rise in June before a decline in July, leading to favorable inflation reports that could prompt the Fed to initiate rate cuts by September.

Key Points:

1. May Core PCE Forecast:

   • Goldman Sachs expects core PCE inflation to increase by 0.13% in May.
   • The year-over-year core PCE inflation rate is projected to be 2.59%.

2. Short-Term Inflation Dynamics:

   • In June, monthly core PCE inflation is forecasted to rise to 0.26% due to the fading of one-time drags from May and a 5bp boost from residual seasonality.
   • July is expected to see a drop in monthly core PCE inflation as residual seasonality turns negative and the impact of the January OER spike dissipates.

3. Fed Rate Cut Outlook:

   • By the September FOMC meeting, Goldman Sachs expects five consecutive months of favorable inflation reports.
   • They project year-over-year core PCE inflation to be at 2.8% by September.
   • This trend is anticipated to provide the Fed leadership with the confidence to implement the first rate cut.

Conclusion:

Goldman Sachs anticipates a modest increase in core PCE inflation for May, followed by temporary fluctuations in the coming months. They predict a series of favorable inflation reports by September, potentially leading the Fed to begin cutting rates. Investors should monitor the upcoming PCE prints and Fed communications closely as these dynamics unfold.