The 3.4% rate of core PCE inflation in May likely marks the peak of this cycle, as tariff effects fade and the recent plunge in oil prices weighs on several categories, including airline fares. Even so, we expect only a slow decline in core inflation from August onwards, leaving the Fed with little choice but to tighten policy amid strength in economic activity and the labour market. Our view is that the Fed will tighten policy by a cumulative 75bp, versus roughly 50bp currently priced into rates markets.
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