A key gauge for the Federal Reserve showed inflation eased slightly from a year ago in June, helping pave the way for a widely anticipated September interest rate cut.
The price index of personal consumption expenditures increased 0.1% in the month and rose 2.5% from a year ago, in line with Dow Jones estimates, the Commerce Department reported on Friday. The year-over-year gain in May was 2.6%, while the monthly measure was unchanged.
Fed officials use the PCE measure as the main baseline for measuring inflation, which continues to exceed the central bank’s long-term target of 2%.
Core inflation, which excludes food and energy, showed a monthly increase of 0.2% and 2.6% on the year, respectively, also in line with expectations. Policymakers tend to focus more on the core as a measure of longer-term trends because gas and grocery costs tend to fluctuate more than other items.
Stock market futures showed a positive opening on Wall Street after the release of Treasury yields.
“The two-word summary of the report is, ‘pretty good,'” said Robert Frick, a corporate economist with Navy Federal Credit Union. “Spending is good enough to maintain expansion, and income is good enough to maintain spending, and the PCE inflation rate is good enough to make the decision to cut rates easy for the Fed.”
Prices of goods fell by 0.2% in the month while services increased by 0.2%. Home-related prices rose 0.3% in June, a slight decrease from the 0.4% increase in each of the last three months and the smallest monthly gain since at least January 2023.
The report also showed that personal income rose by just 0.2%, below estimates of 0.4%. Spending increased by 0.3%, meeting forecasts.
While spending remained strong, the savings rate fell to 3.4%, the lowest level since November 2022.
The report comes with markets paying attention to how the Fed is directing monetary policy.
There is little expectation that the rate-setting Federal Open Market Committee will make any moves at its policy meeting on Tuesday and Wednesday. However, market prices are strongly pointing to a rate cut at the September meeting, which will be the first reduction since the start of the Covid pandemic.
“Overall, it was a good week for the Fed. The economy appears to be on solid ground, and PCE inflation is essentially holding steady,” said Chris Larkin, managing director of trading and investments at Morgan Stanley’s E-Trade. “But next week’s rate cut remains a long shot. And while there is plenty of time for the economic picture to change before the September FOMC meeting, the numbers are already trending in the Fed’s direction.”
As inflation rises to its highest level in more than 40 years in mid-2022, the Fed begins a series of aggressive hikes that push benchmark lending rates to their highest levels in some 23 years. However, the Fed has paused in the past year as it evaluates fluctuating data that early this year showed a revival of inflation but lately has shown a gradual cooling that many policymakers are discussing the possibility of at least one cut this year.
Futures markets have priced in a roughly 90% chance of a September rate cut followed by cuts at the November and December FOMC meetings, according to CME Group’s FedWatch gauge.
Fed officials, though, have been cautious in their comments and have stressed that there is no set policy path, with data guiding the way.
