The Federal Reserve's most favoured measure of inflation is likely to continue softening and enable the central bank to cut rates, said Bank of America, most likely not before December but September "remains a possibility".
May's consumer prices and producer prices inflation data "are favorable for our view that the Fed will be reducing its policy rate later this year", the bank's economists said in a note to clients on Thursday.
"We see recent inflation data as greatly reducing the likelihood that the Fed has to raise rates and view labor market data as indicating that the probability of fast rate cuts is also low."
"An easing cycle that begins in September remains a possibility, particularly if shelter inflation were to moderate further in the next couple of months, but we continue to see a December cut as more likely," they said.
Like May's CPI, PPI came in softer than expected, falling by 0.2% month-on-month in May due in part to a large drop in energy prices and a small decline in food.
Details of the PPI report used for calculating PCE inflation were mixed, the BofA economics team said, with PCE inflation being the Fed's key measure of the cost of living.
Given today's PPI report and yesterday's CPI data, the economists expect core PCE to increase by 0.2% on the month, which would be in line with the Fed's 2% target after a string of hotter inflation data to start the year.
On a year-on-year basis, they forecast core PCE to decline by two-tenths to 2.6%, while headline PCE is expected to rise 0.06% on the month, resulting in the yearly rate falling a tenth to 2.6%
Even with this level of PCE inflation in May, the Fed's outlook for 2.8% yearly core PCE inflation is likely to remain in place, the economists said, with the median member of the FOMC viewing this outlook as consistent with only one rate cut this year.
"We think that the Fed will need to see more than just a few months of favorable inflation data to gain enough confidence to ease."