June PCE Report: A Return to a Benign Inflation Environment

The June Personal Consumption Expenditures Price Index increased in line with expectations, up 2.5% from year-ago levels.

When volatile food and energy costs are factored out, the Federal Reserve’s preferred measure of inflation increased 2.6% from one year ago, above expectations. Economists forecast that the core PCE inflation index would rise by 2.5%. The index increased 0.1% from month-ago levels; excluding food and energy costs, it increased 0.2%.

“While the inflation data over the last two days was just slightly worse than expected and what the Fed and the market would ideally want, the Fed and the market are still getting what they need to keep the Fed on a path to a first cut to their policy rate in September and a soft landing being the most likely economic outcome,” wrote Greg Wilensky, head of US fixed income at Janus Henderson Investors, in commentary Friday.

“We are expecting a ‘dovish hold’ at next week’s Fed meeting with Powell signaling during the press conference that a first cut is likely to occur ‘fairly soon’ if the data continues to evolve as they expect,” Wilensky continues. “There is still a lot of data to be seen between now and the September meeting, including two [Consumer Price Index] prints, so a September cut is far from a certainty. This could drive market volatility, but the bar for the Fed not to cut in September continues to get higher.”

June PCE Inflation Report Highlights

• The PCE Price Index rose 0.1% in June, in line with the FactSet consensus forecast and following no change in May.
• Core PCE rose 0.2% in June, above forecasts for a 0.1% increase and following a 0.1% increase in May.
• The PCE Price Index rose 2.5% year over year in June, in line with forecasts and following an increase of 2.6% in May.
• Core PCE rose 2.6% year over year in June, above forecasts for a 2.5% increase and following an increase of the same amount in May.

Morningstar chief US economist Preston Caldwell notes that for the second quarter overall, core PCE inflation came in slightly higher than expected on the back of an upward revision to May’s data. " Still, core PCE inflation has subsided,” he notes. Core PCE inflation has fallen to a 2.3% annualized rate in the three months ending in June from 4.5% in the three months ending in March. “So we’ve returned to the benign inflation environment that we saw in the second half of 2023,” Caldwell says.