Fed's Preferred Inflation Measure Shows Mixed Readings, Personal Income, Spending Fall: September Rate Cut Remains Likely

The Personal Consumption Expenditure (PCE) price index continued to decline in June as economists anticipated, continuing to bolster the case for a Fed rate cut in September.

The PCE — a basket of goods and services that most U.S. consumers buy, commonly referred to as the Fed’s favorite inflation gauge — witnessed a 2.5% annual increase last month, down from a 2.6% surge in May. Yet when excluding energy and food items, the basket held steady from the previous month.

Concurrently, the pace of increase in personal income and spending fell more than expected, indicating signs of weakness in demand.

June PCE Inflation, Personal Income Reports: Key Highlights

• The PCE price index eased from 2.6% year-over-year in May to 2.5% in June. This annual PCE inflation rate was in line with the forecasted 2.5%, according to Tradingeconomics data.
• On a monthly basis, the PCE price index rose 0.1%, up from the previous unchanged reading, matching expectations.
• Excluding food and energy, the core PCE price index held steady at 2.6% year-over-year in June, missing expectations of a drop to 2.5%.
• On a monthly basis, the core PCE price index increased by 0.2%, increasing from 0.1% in May, and topping expectations.
• Personal income saw a 0.2% increase compared to May, down from the previous 0.4% month-over-month increase and below the estimated 0.4%.
• Personal spending rose by 0.3% compared to the previous month, also down from a 0.4% rate in May and missing the predicted 0.3% rise.

Market Reactions

Before the inflation report, traders anticipated a 100% chance of a September rate cut, according to CME Group's FedWatch tool.

Between now and December, 64 basis points of rate cuts are priced in, suggesting at least one more rate reduction following the Fed’s September meeting.

The inflation and personal income data caused Treasury yields to slightly decline Friday morning, with the rate-sensitive two-year yield dropping by 2 basis points to 4.41%.

Equity futures rose during premarket trading, with S&P 500 contracts up 0.8% and Nasdaq 100 contracts rallying 1.1%.

On Thursday, the SPDR S&P 500 ETF Trust SPY fell by 0.5%.

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