Fed's Preferred Inflation Gauge Falls To Lowest Level Since March 2021, Relieves Trader Interest Rate Worries (CORRECTED)

Editor’s note: The headline and body of this story have been corrected to reflect that core PCE inflation was the lowest in May since March 2021 on a year-over-year basis.

The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure, continued to decline in May as economists expected, cementing market expectations Friday on upcoming Fed rate cuts.

In May, the rate of personal income rose more than expectations, while personal spending grew less than predicted. on a month-over-month basis, indicating some early signs of cooling consumer demand.

May Inflation, Personal Income Reports: Key Highlights

• The PCE price index eased from 2.7% year-over-year in April to 2.6% in May, the Bureau of Economic Analysis reported. The annual inflation rate matched consensus estimate of 2.6%, according to data from Econoday.
• On a monthly basis, the PCE price index stagnated, decelerating from the previous 0.3% growth, matching consensus predictions.
• Excluding food and energy, the core PCE price index fell from 2.8% year-over-year in April to 2.6% in May, in line with expectations and marking the lowest underlying inflation rate since March 2021.
• On a monthly basis, the core PCE price index inched 0.1% higher, decelerating from 0.2% in April, as expected.
• Personal income witnessed a 0.5% increase compared to April, up from the previous 0.3% month-over-month increase and above the estimated 0.2%.
• The growth in personal spending rose 0.2% compared to the previous month, up from a 0.1% rate in April and falling short of the predicted 0.3% rise.

Market Reactions

Prior to the inflation report, traders expected a 65% chance of a September rate cut, according to CME Group’s FedWatch Tool.

The fresh, cooler-than-expected data sparked downside reactions in Treasury yields, with the rate-sensitive two-year yield falling by 3 basis points to 4.68%.

Long-dated Treasury yields remained flat after going up overnight in reactions to the U.S. presidential debate.

Equity futures rose during the premarket trading. Contracts on the S&P 500 were 0.3% higher, while those on the tech-heavy Nasdaq 100 rallied 0.5%.

On Thursday, the SPDR S&P 500 ETF Trust SPY closed 0.2% higher, marking its third straight session of gains.

Now read: GDP Growth Upwardly Revised In Q1 But Consumer Spending Weakens, Continuing Jobless Claims Hit Nearly 3-Year Highs: Thursday’s Economic Digest

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