US PCE Price Index Rises Slightly in June, Supporting Expectations for Fed Rate Cuts

The US personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge for monetary policy, edged up by 0.1% in June following a flat reading in May. On an annualized basis, the PCE price index increased by 2.5% in June, aligning with expectations, after a 2.6% rise in May.

Core PCE, which excludes volatile food and energy components, saw a month-on-month rise of 0.2% in June, meeting expectations, compared to a 0.1% increase in May. Year-on-year, core PCE remained unchanged at 2.6% in June, slightly above the consensus estimate of 2.5%.

The moderate price increases in June signal an improving inflation environment, bolstering the narrative that the Federal Reserve might begin cutting interest rates in September. This data suggests that price pressures are easing, potentially increasing Fed policymakers’ confidence that inflation is moving toward the central bank’s 2% target.

The cooling demand in the economy, in response to the central bank’s aggressive monetary policy tightening in 2022 and 2023, has contributed to this trend. Economic growth averaged 2.1% in the first half of this year, down from 4.2% in the second half of 2023.

Since 2022, the Fed has raised its interest rate by 525 basis points, maintaining its benchmark overnight interest rate within the 5.25%-5.50% range since last July. The current environment of easing inflation and softer labor market conditions has fueled market expectations for three rate cuts this year, with the easing cycle likely starting in September.

Additionally, a separate report indicated that consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.3% in June after a 0.4% rise in May. Personal income rose by 0.2% in June, following a downwardly revised increase of 0.4% in May.