Fed’s Favored Price Gauge Rises at a Mild Pace

The Federal Reserve’s preferred measure of underlying U.S. inflation rose at a tame pace in June and consumer spending remained healthy—two encouraging signs for officials looking to cool inflation without breaking the economy.

The so-called core personal consumption expenditures (PCE) price index, which strips out volatile food and energy items, increased 0.2 percent from May. From a year ago, it rose 2.6 percent, according to Bureau of Economic Analysis (BEA) data out Friday.

Inflation-adjusted consumer spending rose 0.2 percent, while May’s increase was revised higher.

Treasuries rallied and stock futures remained higher as the inflation data came in mostly as expected, even as quarterly data Thursday suggested past figures might have been revised higher. May’s core PCE inflation reading was revised slightly higher but remained at 0.1 percent on a rounded basis.

On a three-month annualized basis, core inflation cooled to 2.3 percent, the least since December.

Friday’s report offers some encouraging evidence that the Fed’s tightening campaign is making its way through the economy without causing too much damage. While officials are widely expected to keep their benchmark interest rate unchanged at a two-decade high when they meet next week, investors are betting the first rate cut will come in September.

“From the Fed’s perspective, cumulatively, we think the data show enough progress—on both inflation and labor market conditions—for policymakers to open the door to a rate cut in September,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a note.

Separate data published Friday by the University of Michigan showed that for consumers, prices remain high and the cooling inflation rate hasn’t helped improve their mood: The school’s index of sentiment slid to an eight-month low in July.

Services Inflation

Policymakers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.2 percent in June for a second month, according to the BEA.

The report showed inflation-adjusted outlays for services and merchandise each rose 0.2 percent. Housing and utilities led increases in services spending, while vehicles and recreational items propelled advances in goods.

Signs of cooling in the labor market are starting to translate into less purchasing power. Wages and salaries rose 0.3 percent in June, half the prior month’s pace. On an inflation-adjusted basis, disposable income growth slowed to 0.1 percent.

What Bloomberg Economists Say…

“Details of the Personal Income and Outlays report for June indicate U.S. consumers are getting stretched thin. Though spending continued to grow at a healthy, albeit slower, clip, income growth slowed more rapidly. And with the labor market cooling, we think consumption growth will ease further in the second half of the year.”

—Stuart Paul, Estelle Ou & Eliza Winger, economists

The saving rate fell to 3.4 percent, the lowest since December 2022, suggesting that consumers have less firepower to ramp up spending in the coming months. A Philadelphia Fed report published earlier in the week showed credit card delinquencies are on the rise.

Additional data due next week, including the government’s monthly report on employment, will offer the latest insight on how well income growth is holding up.

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