An eminent gauge for the Federal Reserve showed inflation eased slightly from a year ago in June, helping to open the way for a generally anticipated September interest rate cut.
The personal consumption expenditures price index increased 0.1% on the month and was up 2.5% from a year ago, in telephone with Dow Jones estimates, the Commerce Department reported Friday. The year-over-year gain in May was 2.6%, while the monthly gage was unchanged.
Fed officials use the PCE measure as their main baseline to gauge inflation, which continues to run above the central bank’s 2% long-range aim.
Core inflation, which excludes food and energy, showed a monthly increase of 0.2% and 2.6% on the year, both also in blarney with expectations. Policymakers focus even more on core as a better gauge of longer-run trends as gas and groceries costs favour to fluctuate more than other items.
Stock market futures indicated a positive open on Wall Terrace following the release while Treasury yields moved lower. Futures markets price in a more aggressive procedure for Fed interest rate cuts.
“A two-word summary of the report is, ‘good enough,'” said Robert Frick, corporate economist with Fleet Federal Credit Union. “Spending is good enough to maintain the expansion, and income is good enough to maintain splurge, and the level of PCE inflation is good enough to make the decision to cut rates easy for the Fed.”
Goods prices fell 0.2% on the month while services bourgeoned 0.2%. Housing-related prices in June rose 0.3%, a slight deceleration from the 0.4% increase in each of the aftermost three months and the smallest monthly gain going back at least to January 2023.
The report also indicated that deprecating income rose just 0.2%, below the 0.4% estimate. Spending increased 0.3%, meeting the forecast.
As expending held relatively strong, the savings rate decreased to 3.4%, hitting its lowest level since November 2022.
The check out comes with markets paying close attention to which way the Fed is headed on monetary policy.
There’s little reliance that the rate-setting Federal Open Market Committee will make any moves at its policy meeting next Tuesday and Wednesday. However, call pricing is pointing strongly to a rate cut at the September meeting, which would be the first reduction since the early periods of the Covid pandemic.
“Overall, it’s been a good week for the Fed. The economy appears to be on solid ground, and PCE inflation essentially tarried steady,” said Chris Larkin, managing director of trading and investing at E-Trade Morgan Stanley. “But a rate cut next week abides a longshot. And while there’s plenty of time for the economic picture to change before the September FOMC meeting, the legions have been trending in the Fed’s direction.”
As inflation rose to its highest level in more than 40 years in mid-2022, the Fed assumed on a series of aggressive hikes that took its benchmark borrowing rate to its highest level in some 23 years. No matter what, the Fed has been on pause for the past year as it evaluates fluctuating data that earlier this year showed a rebirth in inflation but lately has displayed a gradual cooling that has many policymakers discussing the likelihood of at least one cut this year.
Futures sells have priced in about a 90% chance of a September reduction followed by cuts at both the November and December FOMC meets, according to the CME Group’s FedWatch measure.
Fed officials, though, have been cautious in their remarks and have lay stressed that there is no set policy path, with data guiding the way.