A key measure of the U.S. Federal Reserve showed inflation fell slightly from a year ago in June, helping pave the way for a widely expected interest rate cut in September.
The U.S. Commerce Department said Friday that its personal consumption expenditures price index rose 0.1% on a monthly basis and 2.5% from a year earlier, in line with Dow Jones estimates. The annual increase in May was 2.6%, while the monthly measure was unchanged.
Federal Reserve officials use the personal consumption expenditures measure as a key baseline for measuring inflation, which remains above the central bank's long-run target of 2%.
Core inflation, which excludes food and energy, rose 0.2% on the month and 2.6% on the year, both in line with expectations. Policymakers focus more on core inflation as a better gauge of longer-term trends, as gas and grocery costs tend to be more volatile than other items.
Stock market futures pointed to a positive open on Wall Street following the data, while Treasury yields fell. Futures markets are anticipating a more aggressive path of rate cuts by the Federal Reserve.
“The report sums it up in two words: ‘good enough,’” said Robert Frick, an economist at Navy Federal Credit Union. “Spending is good enough to sustain the expansion, income is good enough to sustain spending, and the level of PCE inflation is good enough to make it easy for the Fed to cut rates.”
Goods prices fell 0.2% on the month, while services prices rose 0.2%. House prices rose 0.3% in June, a slight slowdown from the 0.4% increase in each of the previous three months and the smallest monthly gain since at least January 2023.
The report also indicated that personal income rose by only 0.2%, which was less than the estimate of 0.4%. Spending also rose by 0.3%, which was in line with expectations.
With spending remaining relatively strong, the savings rate fell to 3.4%, its lowest level since November 2022.
The report comes as markets are paying close attention to where the Federal Reserve is heading with monetary policy.
There is little expectation that the interest-rate-setting Federal Open Market Committee will make any moves at its policy meeting next Tuesday and Wednesday. However, market pricing is strongly suggesting a rate cut at the September meeting, which would be the first since the early days of the Covid pandemic.
“Overall, it was a good week for the Fed,” said Chris Larkin, managing director of trading and investment at E-Trade Morgan Stanley. “The economy appears to be on solid ground, with PCE inflation remaining essentially flat. But a rate cut next week remains a distant possibility. While there is plenty of time to change the economic picture before the September FOMC meeting, the numbers were trending in the Fed’s favor.”
With inflation hitting its highest level in more than 40 years in mid-2022, the Federal Reserve embarked on a series of aggressive rate hikes that took its benchmark interest rate to its highest level in about 23 years. However, the Fed has been on pause over the past year as it assesses volatile data that earlier this year showed a rebound in inflation but more recently has shown a gradual slowdown that has many policymakers discussing the possibility of at least one rate cut this year.
Futures markets have priced in about 90% odds of a rate cut in September, followed by cuts at the FOMC meetings in November and December, according to CME Group's FedWatch gauge.
But Fed officials were cautious in their comments, stressing that there is no set path for monetary policy, and that the data is what guides the path.
