A key indicator for the U.S. Federal Reserve showed inflation eased slightly from a year ago in June, helping pave the way for a widely expected September rate cut.
The personal consumption expenditures price index rose 0.1 percent on a monthly basis and rose 2.5 percent from a year earlier, according to Dow Jones estimates, the Commerce Department said on Friday. The annual gain in May was 2.6%, while the monthly measure was unchanged.
Fed officials use the PCE measure as a key basis for measuring inflation, which continues to run above the central bank’s long-term target of 2 percent.
Core inflation, which excludes food and energy, rose 0.2% monthly and 2.6% year-on-year, both also in line with expectations. Policymakers are focusing even more on the core as a better gauge of long-term trends, since gas and grocery costs tend to fluctuate more than other items.
Stock futures showed a positive opening on Wall Street after the release, while bond yields moved lower. Futures markets price in a more aggressive path for Fed rate cuts.
“A two-word summary of the report is ‘pretty good,'” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending is good enough to sustain expansion and income is good enough to sustain spending and the level of PCE inflation is good enough to make the decision to cut rates easy for the Fed.”
Prices of goods fell 0.2% on a monthly basis while services rose 0.2%. Home-related prices rose 0.3% in June, a slight slowdown from the 0.4% rise in each of the past three months and the smallest monthly gain until at least January 2023.
The report also said personal income rose just 0.2 percent, below the 0.4 percent estimate. Spending rose 0.3%, meeting the forecast.
As spending remained relatively strong, the savings rate fell to 3.4%, the lowest level since November 2022.
The report comes as markets pay close attention to how the Fed is steering monetary policy.
There is little expectation that the rate-setting Federal Open Market Committee will make any moves at its policy meeting next Tuesday and Wednesday. However, market prices strongly point to a rate cut at the September meeting, which would be the first cut since the early days 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 has remained broadly flat,” said Chris Larkin, managing director of trading and investments at E-Trade Morgan Stanley. “But a rate cut next week 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 moving in the Fed’s direction.”
As inflation hit a 40-year high in mid-2022, the Fed launched a series of aggressive hikes that lifted its key lending rate to a 23-year high. But the Fed has been on pause for the past year as it assesses fluctuating data that earlier this year showed a resurgence in inflation, but has recently shown a gradual cooling that has many policymakers discussing the possibility of at least one cut this year.
Futures markets have priced in about a 90% chance of a September cut, followed by cuts at both the November and December FOMC meetings, according to CME Group’s FedWatch gauge.
Fed officials, however, were cautious in their remarks and emphasized that there is no set policy path, with the data leading the way.
