The personal consumption expenditures (PCE) price index rose 2.5% in June compared to the same time last year, a slight decline from the previous month’s rate of 2.6%.
Why it matters: The easing inflation potentially opens the door for the Federal Reserve to consider an interest rate cut in September.
The details:
- Core inflation, which excludes volatile food and energy prices, saw a monthly increase of 0.2% and an annual increase of 2.6%, both meeting expectations.
- Personal income growth was lower than anticipated at 0.2%, while consumer spending rose 0.3%, meeting forecasts.
- The personal savings rate decreased to 3.4%, the lowest level since November 2022.
Market participants are closely watching the Fed’s next moves, with little expectation of rate changes during the upcoming meeting next week. However, current pricing trends strongly suggest a rate cut in September, the first potential reduction since the early days of the COVID-19 pandemic.
What they’re saying:
- “A two-word summary of the report is, ‘good enough,'” said Robert Frick, corporate economist with Navy Federal Credit Union. “Spending is good enough to maintain the expansion, and income is good enough to maintain spending, and the level of PCE inflation is good enough to make the decision to cut rates easy for the Fed.”
- “Overall, it’s been a good week for the Fed. The economy appears to be on solid ground, and PCE inflation essentially remained steady,” said Chris Larkin, managing director of trading and investing at E-Trade.
The background: The Fed implemented a series of aggressive rate hikes in response to inflation reaching a 40-year high in mid-2022, bringing its benchmark borrowing rate to its highest level in 23 years. The Fed has paused rate hikes for the past year to evaluate fluctuating data.
What’s next: Futures markets have priced in a roughly 90% chance of a rate reduction in September, with additional cuts expected in November and December. However, Fed officials emphasize that no set policy path has been determined, and decisions will continue to be data-driven.
Full story
From the @WSJ:
"The Fed tried not to tip its hand too much following its meeting on Wednesday, saying risks between inflation and unemployment “continue to move into better balance.” Fed Chair Jerome Powell still insists future moves will be fully dependent on incoming data.
But… pic.twitter.com/Sj8kWCT3Ms— Mohamed A. El-Erian (@elerianm) August 1, 2024
The personal consumption expenditures (PCE) price index increased by 0.1% in June and was up 2.5% compared to the same time last year. This annual rate marks a slight decline from the previous month’s rate of 2.6%. Core inflation saw a monthly increase of 0.2% and an annual increase of 2.6%, both of which met expectations.
Personal income growth was lower than anticipated, at just 0.2% compared to the 0.4% estimate. Consumer spending rose 0.3%, meeting forecasts, while the personal savings rate decreased to 3.4%.
As expected, the #FederalReserve left interest rates unchanged and shifted the balance of risks in favor of less labor market strength.
The focus now shifts to Chair Powell's press conference where he will be pressed on the likelihood of a September rate cut.#economy…— Mohamed A. El-Erian (@elerianm) July 31, 2024
This data indicates a slight easing in inflation compared to a year ago, potentially opening the door for the Federal Reserve to consider an interest rate cut in September.
#Fed Chair #Powell press conference:
▶️Attentive to both sides of mandate
▶️Labor market conditions back to 2019: strong but not overheated
▶️Labor/Inflation risk closer to balance
▶️More good data would strengthen confidence
▶️Easing too little/late could unduly weaken economy pic.twitter.com/3bQSohP5vq— Gregory Daco (@GregDaco) July 31, 2024
Current market trends also suggest a more aggressive path toward rate cuts, as Treasury yields moved lower following the announcement. “A two-word summary of the report is, ‘good enough,'” said Robert Frick, corporate economist with Navy Federal Credit Union. “Spending is good enough to maintain the expansion, and income is good enough to maintain spending, and the level of PCE inflation is good enough to make the decision to cut rates easy for the Fed.”
Goods prices fell by 0.2% in June, while services saw a 0.2% increase.
Housing-related costs rose by 0.3%, which is a slight deceleration from previous months.
Easing inflation boosts market optimism
Despite relatively strong spending, the savings rate dropped to its lowest level since November 2022.
Market participants are closely watching the Fed’s next moves, with little expectation that the Federal Open Market Committee will make any rate changes during its upcoming meeting next Tuesday and Wednesday. However, current pricing trends strongly suggest a rate cut in September, the first potential reduction since the early days of the COVID-19 pandemic. “Overall, it’s been a good week for the Fed.
The economy appears to be on solid ground, and PCE inflation essentially remained steady,” said Chris Larkin, managing director of trading and investing at E-Trade. “But a rate cut next week remains a longshot. And while there’s plenty of time for the economic picture to change before the September FOMC meeting, the numbers have been trending in the Fed’s direction.”
In response to inflation reaching a 40-year high in mid-2022, the Fed implemented a series of aggressive rate hikes, bringing its benchmark borrowing rate to its highest level in 23 years.
However, the Fed has paused rate hikes for the past year to evaluate fluctuating data. While inflation showed a resurgence earlier this year, recent trends indicate a gradual cooling, leading many policymakers to discuss the likelihood of a rate cut this year. Futures markets have priced in a roughly 90% chance of a rate reduction in September, with additional cuts expected in November and December, according to the CME Group’s FedWatch measure.
Nevertheless, Fed officials have emphasized caution, stating that no set policy path has been determined and that decisions will continue to be data-driven.
- CNBC.”Fed’s key inflation gauge rose 2.5% in June from a year ago, easing path to rate cut”.
- CNN.”Dow closes more than 600 points higher as investors gear up for rate cuts”.
- FT.”Falling inflation, sturdy economy, happy Fed”.