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Fed’s Preferred Metric Shows Slowing Inflation in June, Clearing the Way for Rate Cuts
July 25, 2024
A key inflation gauge showed inflation easing slightly in June, adding further support for a widely anticipated interest rate cut in September.
The personal consumption expenditures price index, which tracks the prices of a wide range of goods and services and is Fed policymakers’ preferred inflation measure, increased just 0.1% in June from the month before. On an annual basis, the index was up 2.5%. Both figures were in line with economist expectations. The monthly figure was in line with May’s, and the annual increase was a slight slowdown from May’s gain of 2.6%.
“Core” inflation, which excludes food and energy prices, showed a monthly increase of 0.2% and a year-over-year increase of 2.6%. Both were also in line with expectations. Economists generally consider “core” inflation to be a better gauge of long-term trends, as food and energy costs tend to fluctuate more than other items.
Housing prices, a persistent thorn in the Fed’s side, showed a slight deceleration to 0.3% for the month. Housing inflation had been stuck at a 0.4% increase in each of the prior three months, so a slowdown from that level is a welcome indicator that the lagging housing component of the PCE may finally be catching up to more real-time trends that have shown a significant slowdown in housing inflation. The month’s housing cost increase was the lowest since January 2023.
Goods prices saw outright deflation, falling 0.2% for the month. This was offset, however, by a 0.2% increase in services. While consumer spending increased 0.3% for the month, income was up just 0.2%, well below the 0.4% estimate. The savings rate also continued to decline, falling to 3.4%, the lowest level since November 2022. All of which points to a consumer that is continuing to be stretched by inflation.
Still, the report was viewed by many as “good enough.” It is unlikely to shift the Fed’s immediate thinking, and there is little expectation that Fed policymakers will cut interest rates at their meeting next week. There is a growing certainty that we will see a rate cut in September, with the CME Group’s FedWatch tool showing a nearly 90% probability, followed by likely cuts in November and December.
