A key indicator for the Federal Reserve showed inflation easing slightly in June from a year earlier, paving the way for a widely expected interest rate cut in September.
The Commerce Department said Friday that the personal consumption expenditures price index rose 0.1% from the previous month and 2.5% from a year earlier, in line with Dow Jones expectations. It rose 2.6% year-over-year in May and was flat from the previous month.
Federal Reserve officials use the PCE measure as their main gauge of inflation, which continues to run above the central bank’s long-run target of 2%.
Core inflation, which excludes food and energy, rose 0.2% from the previous month and 2.6% from a year earlier, both in line with expectations. Policymakers are placing increased emphasis on core inflation as a more accurate gauge of longer-term trends because gasoline and food prices are more volatile than other items.
After the announcement, Wall Street stock market futures were off to a positive start and Treasury yields fell, with futures markets pricing in a more aggressive path for the Fed to cut interest rates.
“The report can be summed up in one word: good enough,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending is enough to keep the expansion going, incomes are enough to keep spending going, and PCE inflation is high enough to make it easier for the Fed to decide to cut rates.”
Prices of goods fell 0.2% from the previous month, while services rose 0.2%. Home-related prices rose 0.3% in June, slowing slightly from a 0.4% increase over the previous three months and marking the smallest monthly increase since at least January 2023.
The report also revealed that personal income grew by just 0.2%, below expectations of a 0.4% increase, while spending rose by 0.3%, in line with expectations.
Relatively strong spending helped the savings rate fall to 3.4%, the lowest since November 2022.
The report was released as markets focused on the direction the Fed will take monetary policy.
The Federal Open Market Committee (FOMC) is unlikely to make a decision on interest rates when it meets next Tuesday and Wednesday, but markets are strongly suggesting a rate cut at its September meeting that would be the first since the start of the COVID-19 pandemic.
“Overall, it’s been a good week for the Fed. The economy looks to be on solid footing and PCE inflation is essentially stable,” said Chris Larkin, managing director of trading and investments at E-Trade Morgan Stanley. “However, a rate cut next week remains unlikely. There’s plenty of time for economic conditions to change before the September FOMC meeting, but the numbers are moving in the Fed’s direction.”
After inflation rose to its highest level in more than 40 years in mid-2022, the Fed embarked on a series of aggressive rate hikes, raising its benchmark interest rate to its highest in nearly 23 years.But the Fed has paused rate hikes over the past year as it evaluates fluctuating data that showed a resurgence in inflation earlier this year but has recently shown a modest subsidence, leading many policymakers to discuss the possibility of at least one rate cut this year.
According to CME Group’s FedWatch index, the futures market is pricing in about a 90% chance of further rate cuts at the FOMC meetings in November and December, following the September cut.
But Fed officials have been cautious in their comments, stressing that no path has been set and that data will guide the way.
