A key indicator for the Federal Reserve showed that inflation eased slightly from a year earlier in June, helping to pave the way for a widely anticipated interest rate cut in September.
The personal consumption expenditures price index rose 0.1% for the month and was up 2.5% from a year ago, in line with Dow Jones estimates, the Commerce Department reported Friday. The annual gain in May was 2.6%, while the monthly measure remained unchanged.
Fed officials use the PCE measure as the main basis for gauging inflation, which remains above the central bank’s long-term target of 2%.
Core inflation, which excludes food and energy, showed a monthly increase of 0.2% and 2.6% in the year, both also in line with expectations. Policymakers tend to focus even more on the core as a better indicator of long-term trends, since gas and food costs tend to fluctuate more than other items.
Prices of goods fell 0.2% in the month, while services increased 0.2%. Housing-related prices in June rose 0.3%, a slight slowdown from the 0.4% increase in each of the last three months and the smallest monthly gain dating back to at least January 2023.
The report also indicated that personal income increased by just 0.2%, below the estimate of 0.4%. Spending increased 0.3%, meeting the forecast.
The report comes with markets paying close attention to the direction the Fed is taking with monetary policy.
There is little expectation that the Federal Open Market Committee, which sets rates, will take any action at its policy meeting next Tuesday and Wednesday. However, market prices are strongly pointing to a rate cut at the September meeting, which would be the first reduction since the early days of the Covid pandemic.
As inflation rose to its highest level in more than 40 years in mid-2022, the Fed embarked on a series of aggressive hikes that took its benchmark interest rate to its highest level in about 23 years. However, the Fed paused last year as it assessed fluctuating data that earlier this year showed a resurgence in inflation but which has lately shown a gradual cooling that has many policymakers discussing the likelihood of at least one cut this year.
Futures markets have priced in about a 90% probability of a September taper, followed by cuts at the November and December FOMC meetings, according to CME Group’s FedWatch measure.
Fed officials, however, have been cautious in their observations and emphasize that there is no defined policy path, with data guiding the way.
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