The upcoming Fed inflation report on Friday will reveal the following.

• The Federal Reserve's focus on measuring inflation involves tracking the personal consumption expenditures price index, which is predicted to exhibit minimal or no monthly growth in May.
• The core PCE price index is expected to show its lowest annual reading since March 2021 after removing volatile food and energy prices.
• The Commerce Department releases data on inflation, personal income, and spending on Friday at 8:30 a.m. ET.

The Commerce Department will release a key economic report on Friday, which may bring some positive inflation news.

The Federal Reserve's focus on measuring inflation, the personal consumption expenditures price index, is expected to show little to no monthly increase for May, marking the first time since November 2023.

The core PCE price index, closely watched by Fed policymakers, is expected to show its lowest annual reading since March 2021 after removing volatile food and energy prices.

Since the date when core PCE first surpassed the Fed's 2% inflation target during this cycle, despite the central bank's aggressive interest rate hikes, it has not been able to control the pace of price increases within its target range.

The official forecast for Friday's PCE price reading is for it to remain flat on the month, while the core is expected to increase by 0.1%. This is in contrast to the respective increases of 0.3% and 0.2% seen in April. Both the headline and core PCE price readings are projected to be 2.6% higher on a year-over-year basis.

If the core PCE price forecasts become a reality, it will mark a significant milestone.

"According to Beth Ann Bovino, chief economist at U.S. Bank, the PCE core pricing data is expected to come in soft, which is in line with the forecast. This is good news for the Fed and for people's pocketbooks, although it's uncertain if people are feeling the benefits yet."

Although the rate of inflation has decreased significantly from its peak in mid-2022, prices have not. Since March 2021, core PCE has increased by 14%.

The steep climb and its harmful effects are why Fed officials are not ready to declare victory yet, even though there has been significant progress since the rate hikes began in March 2022.

Earlier this week, Fed Governor Lisa Cook stated that achieving a sustainable 2% inflation target is an ongoing process and not a predetermined outcome.

Though Cook and her colleagues have been cautious about the timing and pace of rate cuts, most agree that easing is likely at some point this year as long as the data remain consistent. Futures markets are currently pricing in a high probability that the Fed will implement its first quarter percentage point cut in September, with another to follow by the end of the year. Policymakers at their meeting earlier this month only forecasted one cut.

Bovino stated that we can anticipate a softening in the real economy, which implies that inflation will also decrease later on. This provides a reason to believe that the Fed will be able to make their first cut in September.

"The Fed is still monitoring the data, and it's possible that they may cut rates twice this year based on the numbers. However, it's uncertain if they can wait until just one cut this year or if they'll need to make additional adjustments."

The Commerce Department will release inflation numbers, as well as personal income and consumer spending estimates, at 8:30 a.m. ET. The inflation numbers are expected to be 0.4%, while the consumer spending estimates are at 0.3%.