The Federal Reserve’s preferred inflation gauge was mixed last month, higher energy and food prices. The latest inflation measurement comes as the central bank prepares for a much-anticipated policy meeting next week.
On a monthly basis, the PCE jumped by 0.1 percent, up from zero percent in the previous month.
Core PCE, which omits the volatile food and energy components, was unchanged at 2.6 percent, slightly higher than the market projection of 2.5 percent.
The core PCE price index also climbed by 0.2 percent, topping the 0.1 percent market estimate.
Last month’s increase was driven by a 0.2 percent boost in goods spending and another 0.2 percent jump in services outlays. Additionally, food prices swelled by 1.4 percent, and energy costs advanced by 2 percent.
Fed officials concentrate more on core inflation because it provides a better sense of long-term trends since energy and food tend to be more volatile and out of the central bank’s hands.
BEA data further revealed that personal income edged up by 0.2 percent, down from 0.4 percent in May, which had been adjusted downward from 0.5 percent. The consensus estimate suggested an increase of 0.4 percent.
Personal spending inched higher by 0.3 percent, also down from the upwardly revised 0.4 percent in the previous month. This was in line with the consensus forecast.
Reaction
The latest PCE reading suggests that the administration is “making real progress fighting inflation,” said President Joe Biden.“Over the last year, inflation has come down to 2.5% at a time when the economy has grown 3.1%, we’ve created 2.6 million new jobs, and wages are rising faster than prices,” the president said in a statement. “The agenda that Vice President Harris and I are fighting for has helped us come back strong from the worst economic crisis since the Great Depression and deliver for working families.”
The U.S. financial markets kept their gains largely intact before the opening bells, with the leading benchmark indexes up as much as 1.2 percent.
U.S. Treasury yields were mixed to end the trading week as the benchmark 10-year yield was unchanged at around 4.14 percent. The 2-year yield slipped below 4.41 percent, while the 30-year bond struggled to hold 4.46 percent.
Interest Rates and the Economy
The Fed will convene its two-day policy meeting next week. While investors think the monetary authorities will leave rates unchanged and pull the trigger on a rate cut in September, the futures market is debating whether policymakers will initiate the pivot with a quarter-point or half-point reduction.Based on the ideas of economist Milton Friedman, monetary policy functions with a “long and variable lag,” meaning that it could take time to see the effects of rate cuts in the broader economy.
Fed Chair Jerome Powell conceded this month that the central bank could cut interest rates before reaching its 2 percent inflation target rate. He argued that if officials only cut interest rates when inflation touches 2 percent, then the institution might have waited too long.
Nevertheless, market watchers say that economic conditions—a combination of lower inflation and slower growth—could be enough for the Fed to follow through on loosening monetary policy soon.
“Inflation is headed lower but perhaps for the wrong reasons. Each day brings worrying signs about the health of the consumer—retail/housing sales, surveys of confidence, corporate profit warnings,” Chris Marangi and Kevin Dreyer, the co-chief information officers at Gabelli Funds, said in a note. “Having previously tempered expectations for interest rate cuts, the Federal Reserve may finally act in September (if not sooner). It may be too late to stave off recession, but at least the Fed has the dry powder to cushion any economic softness.”
However, recent economic data might suggest that the Fed continues to have the luxury of waiting to cut rates since growth remains intact.