June 2023 PCE inflation:

Inflation showed further signs of cooling in June, according to a gauge released Friday that closely tracks the Federal Reserve.

The personal consumption price index, excluding food and energy, rose just 0.2% from the previous month, in line with the Dow Jones estimate, the Commerce Department said.

The so-called core PCE rose 4.1% from a year ago, compared to the estimate of 4.2%. The annual rate was the lowest since September 2021, marking a decline from the pace of 4.6% in May.

Overall PCE inflation, including food and energy costs, also rose 0.2% month on month and 3% year on year. The annual rate was the lowest since March 2021, falling from 3.8% in May.

Goods prices even fell by 0.1% this month, while services rose by 0.3%. Food prices also fell by 0.1%, while energy rose by 0.6%.

Markets reacted positively to the report, with stock futures pointing higher and Treasury yields lower.

“Today’s economic releases confirm the current market narrative that inflation is cooling and economic growth continues, providing a favorable environment for risky assets,” said George Mateyo, chief investment officer at Key Private Bank. “The Fed and investors will take solace in these numbers as they suggest that the threat of inflation is diminishing and that the Fed can now take a vacation and take an extended hiatus from future rate hikes.”

The data reinforces other recent releases showing that, at least compared to the rising inflation of a year ago, prices are starting to fall. Readings such as the consumer price index show a slower rise in inflation, while consumer expectations are also coming back in line with longer-term trends.

Fed officials closely monitor the PCE index as it adapts to changing consumer behavior and provides a different view of price trends than the more widely quoted CPI.

Along with the inflation data, the Department of Commerce said personal income rose 0.3% while spending rose 0.5%. Revenues fell slightly short of expectations, while expenses were in line.

The report comes just two days after the Fed announced a quarter-point rate hike, its 11th since March 2022 and the first since skipping its meeting in June. That brought the central bank’s key lending rate to a target range of 5.25%-5.5%, the highest level in more than 22 years.

Following the hike, Fed Chairman Jerome Powell stressed that future decisions about interest rate movements would be based on incoming data rather than a predetermined policy stance. Central bank officials generally believe inflation is still too high despite recent positive trends and want to see several months of solid data before changing direction.

A separate indicator closely monitored by the Fed showed that compensation costs rose at a seasonally adjusted 1% year-over-year in the second quarter. That reading for the employment cost index was slightly below the estimate of 1.1%.

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