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Key Takeaways
- Inflation as measured by Personal Consumption Expenditures likely fell in June, according to forecasts, mirroring the trend seen in a different inflation report earlier this month.
- PCE inflation is especially noteworthy because officials at the Federal Reserve pay close attention to it when setting the nation’s monetary policy.
- Should Friday’s PCE inflation report match expectations, it could pave the way for the Fed to lower its key interest rate as soon as September.
The Federal Reserve’s favorite measure of inflation likely cooled down in June, confirming the central bank’s efforts to subdue price increases are working, paving the way for rate cuts as soon as September.
Forecasters expect Friday’s Personal Consumption Expenditures measure of inflation in June to mirror the trend shown by the Consumer Price Index earlier this month. PCE prices probably rose 2.5% from the year before, down from 2.6% in May, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
The PCE measure of inflation is especially significant because it’s the benchmark that officials at the Federal Reserve pay the most attention to when setting the nation’s monetary policy. The Fed has held its influential fed funds rate at a 23-year high since last July in an effort to push inflation down to its 2% annual goal.
Could Inflation Report Push The Fed Over the Edge?
Fed officials have said falling inflation would prompt them to start lowering the rate, reversing a campaign of rate hikes that began in March 2022.
The high fed funds rate has helped push interest rates on mortgages, credit cards, and other loans up, with many rates at or near their highest in decades. Lower PCE inflation could provide the data the Fed needs to justify a shift away from high rates, which are meant to slow the economy down.
Financial markets are pricing in a near certainty that the Fed will hold the fed funds rate steady at its meeting next week but cut it in September, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
Rate cuts are growing more likely as PCE inflation edges closer to the 2% mark. Fed Chair Jerome Powell made clear the central bank plans to make cuts before inflation actually falls to the central bank’s goal.
Core PCE Will Be in Focus
Powell and other Fed decision-makers especially watch so-called core inflation, which excludes the often-volatile prices for food and energy. Core PCE inflation rose 2.6% over the year in May, and forecasters expect that to fall to a 2.5% annual increase as well.
Forecasters are looking for core inflation to cool because housing costs—the biggest contributor to overall inflation—are rising more slowly than they have over the past few years . Crucially, rent rose only modestly in June, which helped ease the overall inflation rate in the CPI report earlier this month.
“The downshift in rents back to a pre-pandemic pace is likely to give Fed officials increased confidence that inflation is on a sustainable path back to 2%,” economists at Deutsche Bank wrote in a research note.