Fed's Favored Inflation Gauge Cools To 2-Year Lows: Strong Spending Keeps Fed Rate Bets Steady - State St

Inflation statistics keep pointing to a gradual decrease in price pressures across the economy. This is what emerges from the June report of the Personal Consumption Expenditure (PCE) price index released on Friday by the Bureau of Economic Analysis.

In June, the Fed’s preferred measure of underlying inflation fell to 4.1% year-on-year, slightly below economist projections of 4.2%, reinforcing investor optimism that the most intense period of elevated price pressures has now passed.

Concurrently, the BEA reported that monthly consumer spending increased 0.5% in June, up from 0.1% the previous month and exceeding estimates of a 0.4% gain.

Key Highlights from the June’s PCE Report:

The U.S. PCE price index came in at 3% year-on-year in June, falling from the 3.8% annual rate in May, and matching the the expected 3%. This marks the lowest level for PCE inflation since March 2021.
On a monthly basis, PCE inflation surged 0.2%, accelerating from the 0.1% rise in May but in line with the expected 0.2% increase.
Food prices increased 4.6% year-on-year and energy prices fell 18.9% . Prices for goods fell 0.6% and prices for services rose 4.9% annually.
The Fed’s preferred measure of inflation, the core PCE price index (PCE less food and energy), dropped from 4.6% to 4.1% yearly in June, slightly below estimates of 4.2%. This marks the lowest level for core PCE inflation since October 2021.
Core PCE inflation advanced at 0.2% monthly pace, decelerating from the 0.3% rise in May and in line with the expectations.

Market Reactions

Traders are assigning a 20% probability of a 25-basis-point rate hike in September and a 29% probability of a hike by the November meeting, unchanged following the data.

Futures on the S&P 500 are up 0.6% an hour before the opening bell, suggesting a positive start on Friday. The SPDR S&P 500 ETF Trust (NYSE:SPY) achieved new yearly highs on Thursday, but subsequently fell 0.7% as volatility flared due to a surprising policy tweak by the Bank of Japan.

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