Solid GDP with less consumption, still strong capex. PCE prices.: U.S. Data Pulse | North America

Research evidence excerpt

Solid GDP with less consumption, still strong capex. PCE prices.: U.S. Data Pulse | North America

UpdateM

May PCE inflation: Upside driven by airfares, shelter, and

financial services

Core PCE inflation rose 0.32% m/m in May, below our expectation (consensus 0.3%,

MS estimate 0.36%). Headline came in at 0.45% (0.48% MS estimate, 0.5%

consensus). In terms of revisions, April was revised up but only +1bp.

Revisions and the May reading imply core PCE inflation running at a 3‑month annualized

pace of 3.52% (3.83% in April), a 6‑month pace of 4.14% (3.85% in April), and a 12‑month

rate of 3.41% in May (vs. 3.32% in April).

We expect gradual disinflation path ahead. Including historical revisions we forecast core

PCE inflation at 3.0% q4/q4 in 2026, assuming the oil price drop proves persistent. We

forecast softer airfares inflation ahead, continued normalization in core goods inflation as

the tariff pass-through fades, and decelerating housing inflation.

As we noted in our weekly, the Fed expects core PCE inflation at 3.3%q4/q4 for 2026,

above our forecast. But we suspect the last SEP did not incorporate the effect of a

potential de-escalation in the US-Iran war and, consequently, assumed stickier oil prices

than our forecasts. The average monthly pace for core PCE inflation consistent with the

SEP forecast is 0.21%m/m the rest of the year – vs our forecast of 0.17%m/m. Based on

our lower inflation numbers, we expect the Fed to remain on hold the rest of the year.

Core goods came back to negative territory in May, signalling that tariff pass-through

is close to or perhaps at completion. Our estimation of the total tariff pass-through to

PCE prices is about 62bp so far, close to our forecast of a total push to prices of about

70bp.