U.S. prices rose modestly in June as the cost of goods fell, balancing an increase in service prices. This indicates an improving inflation landscape that could allow the Federal Reserve to start cutting interest rates in September. The Commerce Department’s report on Friday also highlighted a slowdown in consumer spending for the month. These signs of reduced price pressures and cooling demand may bolster the Federal Reserve’s confidence that inflation is moving toward its 2% target.
“Inflation continues to moderate and is gradually approaching the Fed’s target,” said Jeffrey Roach, chief economist at LPL Financial. “At the upcoming meeting, we should expect the Fed to emphasize the slowdown in hiring as a reason to cut rates in September.” The Fed’s next policy meeting is scheduled for July 30-31.
The personal consumption expenditures (PCE) price index increased by 0.1% in June after remaining unchanged in May, according to the Bureau of Economic Analysis. Goods prices dropped by 0.2% following a 0.4% decline in May, with motor vehicles and parts prices falling by 0.6%. Prices for furnishings and durable household equipment also decreased for the third consecutive month, while other long-lasting manufactured goods saw a 1.8% rebound. Gasoline and other energy goods prices fell by 3.5%, and clothing and footwear became cheaper for the second month in a row.
Conversely, the cost of services rose by 0.2%, matching May’s increase. This included higher costs for housing and utilities, albeit at a slower pace, as well as rising financial services and insurance costs. However, transportation services prices dropped for the third consecutive month. Over the 12 months through June, the PCE price index climbed by 2.5%, marking the smallest year-on-year gain in four months, down from 2.6% in May.
Excluding volatile food and energy components, the core PCE price index increased by 0.2% in June, following an unrevised 0.1% gain in May. On a year-over-year basis, core PCE inflation rose by 2.6%, consistent with May’s rise. Economists had forecast both monthly headline PCE and core inflation to rise by 0.1% in June.
The data indicated that demand in the economy has cooled in response to the Fed’s aggressive monetary policy tightening in 2022 and 2023, with economic growth averaging 2.1% in the first half of this year, compared to 4.2% in the second half of 2023. Following the inflation data release, U.S. Treasury yields dropped, and the dollar weakened slightly against a basket of currencies.
The Federal Reserve has maintained its benchmark overnight interest rate in the 5.25%-5.50% range since last July, having increased its policy rate by 525 basis points since 2022. With inflation subsiding and labor market conditions easing, financial markets anticipate three rate cuts this year, starting in September.
Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose by 0.3% in June, following a 0.4% increase in May. Adjusted for inflation, consumer spending gained 0.2% after a 0.4% climb in May. Spending is likely to remain moderate as income growth slows, with personal income rising by 0.2% in June and wages increasing by 0.3%. The saving rate slipped to 3.4% from 3.5% in May.
The data was part of the advance second-quarter GDP report, which showed the economy growing at an annualized rate of 2.8%, double the first quarter’s 1.4% pace.
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