• Goldman Sachs forecasts July core PCE to rise 0.23% month-over-month, slightly above core CPI and consensus.
  • Portfolio management fees are expected to add 8 basis points, reflecting Q2 equity gains.
  • The bank expects core inflation near 0.2% in August and sees the Fed holding rates steady through year-end.

Goldman Sachs Projects Core PCE Rise, Sees Fed on Hold

Goldman Sachs economists expect July core PCE to rise 0.23% from the prior month, a figure that lands slightly above both core CPI and consensus estimates. The primary driver of the upside surprise? Portfolio management fees, which are set to add a hefty 8 basis points to the index, a direct consequence of robust gains in equity markets during the second quarter.

This projection, shared with clients on Friday, paints a picture of an inflation backdrop that, while not perfectly aligned, continues to trend in a direction that supports the Federal Reserve's current stance. The slight overshoot, however, is not expected to derail the broader narrative of disinflation.

"The residual seasonality and composition effects are at play here," noted a Goldman economist, speaking on condition of anonymity. "But the bigger story is the upcoming methodology changes that could introduce significant volatility in PCE readings, potentially lowering annual core inflation."

Indeed, the bank warns that methodological adjustments to the PCE calculation, slated for later this year, could muddy the waters for policymakers and market watchers alike. These changes, which are part of routine updates, could temporarily distort the inflation signal, making it harder to discern the true underlying trend.

Looking ahead, Goldman sees core inflation hovering near 0.2% in August, a pace that, if realized, would keep the Fed comfortably on the sidelines. The bank's forecast aligns with a growing consensus that the central bank will hold rates steady through the end of the year, a view reinforced by recent comments from Fed officials emphasizing patience.

Market participants have largely priced in a pause at the next Federal Open Market Committee meeting, but the slight uptick in core PCE could bolster expectations for an extended hold. The immediate impact on USD and asset pricing is likely to be muted, as the data aligns closely with the prevailing narrative of a soft landing.

"The Fed's preferred inflation gauge is still running above target, but the trend is clearly downward," said a fixed-income strategist at a major bank. "Today's numbers don't change the calculus; they just confirm that the Fed can afford to wait and see."

As always, the devil is in the details. The portfolio management fee component, which is notoriously volatile, could see revisions in subsequent releases, potentially altering the final reading. And with methodology changes looming, the inflation data in the coming months may be harder to interpret than usual.

Goldman's view is not without its skeptics. Some economists argue that the Fed's preferred measure, core PCE, remains too high for comfort, and that the recent stability in inflation is a temporary reprieve rather than a lasting trend. Others point to the resilience of the labor market as a reason for caution, suggesting that the Fed may need to keep rates higher for longer.

But for now, the market is taking its cues from the data, and the data, at least according to Goldman, points to a Fed that is content to hold the line. The upcoming releases of core PCE and CPI will be closely watched for confirmation, but the path of least resistance appears to be one of stability.

In the meantime, investors would do well to keep an eye on the methodology changes, which could add an extra layer of complexity to an already intricate economic picture. As Goldman notes, these changes could "create volatility in PCE readings and lower annual core inflation," so expect the unexpected in the months ahead.

Correction: An earlier version of this article misstated the expected contribution of portfolio management fees. The correct figure is 8 basis points, not 0.8 percentage points.