The U.S. Federal Reserve’s preferred measure of overall inflation, the Personal Consumption Index, showed some slight easing in June, moving down to 2.5% from this time last year in a shift that should help propel the monetary body toward the first downward adjustment to its benchmark rate in over four years.
Friday’s report from the Commerce Department’s Bureau of Economic Analysis finds prices on consumer goods and services inched up 0.1% from May to June. The core PCE reading, which strips out volatile food and energy prices, moved up 0.2% on a monthly basis and came in at an annual rate of 2.6% in June.
The PCE data, which measures monthly price changes on a representative “basket” of goods and services, is the inflation reading given the most credence by Fed officials over the Labor Department’s monthly Consumer Price Index tabulation that relies on survey data to assemble its inflation measure.
June’s PCE numbers, while still running north of the Fed’s target annual rate of 2%, reflect continued downward momentum which will be seen as a positive by the body’s rate-setting Open Market Committee, which is scheduled to meet next week.
“A two-word summary of the report is ‘good enough,’” Robert Frick, corporate economist with Navy Federal Credit Union, told CNBC. “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.”
On a monthly basis, prices for goods decreased 0.2% and prices for services increased 0.2%. Food prices increased 0.1% and energy prices decreased 2.1%, per Friday’s report. Personal income rose 0.2% on a monthly basis while consumer spending increased 0.3% over May.
Here’s what the Fed is saying about rate adjustments
During his regularly scheduled appearance before Congressional members earlier this month, Federal Reserve Chairman Jerome Powell declined to offer any timelines for when the Fed may make a move to reduce its federal funds rates, currently parked in the 5.25-5.5% range, but did note there were positive economic trends afoot that may portend an upcoming rate reduction.
Powell told U.S. Senate committee members that the U.S. jobs market was finally settling down after two years of demand far outpacing available workers and that while unemployment has inched up to 4.1% from the 3.7% rate that closed out 2023, the metric was still historically low and job growth so far this year is averaging over 200,000 new positions per month.
Powell also underscored that Fed officials are now navigating a more balanced challenge when it comes to adjusting monetary policy to successfully achieve the body’s two-pronged mandate of maintaining price stability and maximum employment.
“We’re well aware that we now face two-sided risks and have for some time,” Powell said on July 9. “The labor market appears to be fully back in balance. If we loosen policy too late or too little we could hurt economic activity. If we loosen policy too much or too soon then we could undermine the progress on inflation.”
At its June meeting, the Fed’s Open Market Committee voted to keep rates at the current range of 5.25% to 5.5%, where they’ve stood since July 2023 after a series of 11 straight increases were levied by the monetary body, a strategy aiming to cool off a too-hot U.S. economy.
While a series of steady U.S. inflation downticks over the second half of 2023 had spurred the Fed to signal late last year it could assess multiple federal lending rate cuts in 2024, inflation headed back up early this year and forced the monetary body to recompute.
At the conclusion of its June meeting, the Fed committee was projecting five interest rate cuts by the end of 2025, with a likely .25% reduction this year and four additional reductions next year, ending 2025 with the body’s benchmark rate at 4.1%.
But Powell said no cuts will be made until policymakers have greater confidence in where the U.S. economy is headed and that will be a decision based on further data.
In a recent poll of U.S. economists conducted by Reuters, 100% of respondents expect the Fed to stand pat on rates at the conclusion of next week’s meeting while more than 80% believe a 0.25% cut will happen at the monetary body’s September meeting.
“The key question now is whether the positive momentum we’ve seen over the last three months will be disrupted heading into the September meeting,” Olu Sonola, head of U.S. economic research at Fitch Ratings, told Reuters on Friday following release of the latest PCE report. “With one eye on recent labor market developments, the Fed is now likely to use the meeting next week to set the stage for a September rate cut.”