Inflation demonstrated further signs of abatement in June, as indicated by a gauge closely monitored by the Federal Reserve.
The personal consumption expenditures price index, excluding food and energy, exhibited a mere 0.2% increase from the previous month, in accordance with the Dow Jones estimate, as reported by the Commerce Department.
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The so-called core PCE increased by 4.1% compared to the previous year, slightly below the estimated 4.2%. This marks the lowest annual rate since September 2021 and a decline from the 4.6% pace observed in May.
Headline PCE inflation, including food and energy costs, also rose by 0.2% on a monthly basis and increased by 3% annually. The yearly rate is the lowest since March 2021 and a decrease from the 3.8% recorded in May.
While goods prices experienced a 0.1% decrease for the month, services witnessed a 0.3% rise. Food prices also declined by 0.1%, while energy prices increased by 0.6%.
The report received positive reception from the market, with stock market futures trending higher and Treasury yields heading lower.
“Today’s economic releases confirm the prevailing market narrative of cooling inflation and continued economic growth, which creates a favorable environment for risk assets,” stated George Mateyo, Chief Investment Officer at Key Private Bank. “Both the Fed and investors can take comfort in these figures, as they suggest that the threat of inflation is dissipating, allowing the Fed to potentially take a break from interest rate increases and go on vacation.”
The data supports recent findings indicating that, in comparison to the soaring inflation of the previous year, prices have started to stabilize. Indicators such as the consumer price index reveal a slower inflationary rise, while consumer expectations align more closely with long-term trends.
The Federal Reserve closely monitors the PCE index as it captures changes in consumer behavior and provides a different perspective on price trends compared to the more widely cited CPI.
In addition to the inflation data, the Commerce Department reported a 0.3% increase in personal income and a 0.5% increase in spending. While income fell slightly below expectations, spending remained in line.
This report follows the Federal Reserve’s recent announcement of a quarter percentage point interest rate increase, marking its 11th hike since March 2022 and its first hike after skipping the June meeting. This brings the central bank’s key borrowing rate to a target range of 5.25%-5.5%, its highest level in over 22 years.
Following the hike, Federal Reserve Chairman Jerome Powell emphasized that future rate decisions would be based on incoming data rather than a predetermined policy course. Despite the recent positive trends, central bank officials generally believe that inflation remains too high and would require multiple months of solid data before considering any changes in direction.
Another closely followed indicator by the Federal Reserve, the employment cost index, showed that compensation costs increased by a seasonally adjusted 1% annually in the second quarter. This figure slightly fell short of the estimated 1.1%.
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