The Federal Reserve’s preferred measure of inflation showed signs of easing in June, raising the possibility of a rate cut in September. The personal consumption expenditures (PCE) price index increased by 2.5% compared to the previous year, slightly down from 2.6% in May. On a monthly basis, the PCE index rose by 0.1%, consistent with market expectations.
Core inflation, which excludes volatile food and energy prices, saw a 0.2% monthly increase and a 2.6% annual rise. This core measure is particularly significant for the Fed as it provides a clearer view of underlying inflation trends, unaffected by temporary fluctuations in prices of items like gas and groceries.
The data has had a positive impact on financial markets, with stock market futures pointing to a strong opening and Treasury yields decreasing. Market analysts, such as Robert Frick of Navy Federal Credit Union, noted that the current economic conditions are “good enough” to maintain economic expansion and consumer spending, which may encourage the Fed to consider a rate cut.
June also saw a decrease in goods prices by 0.2%, while services prices increased by 0.2%. Housing-related costs grew by 0.3%, a slight decrease from previous months. The report further indicated that personal income rose by just 0.2%, below the expected 0.4%, while consumer spending increased by 0.3%, matching forecasts. However, the savings rate dropped to 3.4%, the lowest since November 2022.
The Federal Open Market Committee (FOMC), the Fed’s policy-setting body, is not expected to change rates at its upcoming meeting. However, market indicators suggest a strong likelihood of a rate cut in September, potentially the first since the onset of the COVID-19 pandemic.
Chris Larkin of E-Trade Morgan Stanley noted that while the economic outlook seems favorable for a rate cut, the Fed’s decision will depend on upcoming data. The Fed has been cautious in its public statements, emphasizing that future policy moves will be guided by ongoing economic indicators. The Fed had previously raised rates aggressively in 2022 to combat the highest inflation in over 40 years but has paused any changes for the past year as inflation data has shown signs of cooling.
