Fed's Key Inflation Gauge Rises 2.5% in June, Meeting Expectations

An important measure for the Federal Reserve indicated a slight easing of inflation from a year ago in June, potentially paving the way for a widely anticipated interest rate cut in September. The personal consumption expenditures (PCE) price index increased by 0.1% month-over-month and was up 2.5% year-over-year, aligning with Dow Jones estimates, according to the Commerce Department’s report on Friday. In May, the annual gain was 2.6%, and the monthly measure remained unchanged.

Fed officials use the PCE measure as their primary baseline for gauging inflation, which remains above the central bank’s long-range target of 2%. Core inflation, which excludes food and energy prices, showed a monthly increase of 0.2% and an annual increase of 2.6%, both in line with expectations. Policymakers focus more on core inflation as it provides a better gauge of longer-term trends since gas and grocery costs tend to fluctuate more than other items.

Details from the Report:

Goods prices fell by 0.2% for the month, while services increased by 0.2%. Housing-related prices in June rose by 0.3%, a slight deceleration from the 0.4% increase seen in each of the previous three months and the smallest monthly gain since at least January 2023. Personal income rose just 0.2%, below the 0.4% estimate, while spending increased by 0.3%, meeting the forecast.

The report comes as markets closely watch the Federal Reserve’s next moves on monetary policy. There is little expectation that the rate-setting Federal Open Market Committee (FOMC) will make any moves at its policy meeting next Tuesday and Wednesday. However, market pricing strongly points to a rate cut at the September meeting, which would be the first reduction since the early days of the COVID-19 pandemic.

Fed’s Response and Market Reactions:

As inflation rose to its highest level in more than 40 years in mid-2022, the Fed embarked on a series of aggressive rate hikes, taking its benchmark borrowing rate to the highest level in approximately 23 years. However, the Fed has paused rate hikes for the past year as it evaluates fluctuating data that initially showed a resurgence in inflation but has recently indicated a gradual cooling. This has led many policymakers to discuss the likelihood of at least one rate cut this year.

Futures markets have priced in about a 90% chance of a September rate reduction, followed by cuts at both the November and December FOMC meetings, according to the CME Group’s FedWatch measure. However, Fed officials have been cautious in their remarks, emphasizing that there is no set policy path and that data will guide their decisions.