The Federal Reserve’s preferred inflation measure continued to gradually cool overall in June even as a “core” inflation measure held steady, likely enough evidence of progress to keep the central bank on track for a rate cut later this year but not enough to stoke speculation that it might reduce rates at its meeting next week.
The Personal Consumption Expenditures index was 2.5 percent higher in June than a year earlier, slower than May’s 2.6 percent and in line with economist expectations, fresh data released on Friday showed.
A “core” price measure that strips out food and fuel costs for a better sense of the underlying inflation trend proved slightly more stubborn. Yearly core inflation was 2.6 percent, matching its reading in May. And on a monthly basis, both measures of inflation climbed modestly.
Overall, the report served as a reminder that inflation is substantially lower than it was at its 2022 peak, but is not yet entirely vanquished.
This inflation measure peaked above 7 percent in 2022, so June’s reading is much cooler. But inflation has lingered above the Fed’s 2 percent goal for more than three years now. That long period of rapid increases has left price levels much higher than they were as recently as 2020, a reality that has caused dismay among consumers who continue to balk at heftier price tags. That in turn has been bad news for incumbent Democrats, who have struggled to take credit for a strong job market and a burst of infrastructure spending at a time when inflation is souring voters’ view of the economy.
Such a long period of inflation has also made the Fed cautious. Policymakers have been holding interest rates at 5.3 percent for the past year, making it expensive to borrow money in a bid to weigh on consumer demand and cool the broader economy. Even though inflation is now coming down — suggesting that rates may no longer need to be so punishingly high — policymakers have not wanted to cut borrowing costs before they are sure that they have fully wrestled price increases under control.
Given that, investors mostly expect Fed officials to hold off on a rate cut at their two-day meeting that concludes on July 31. Instead, traders and economists widely think that central bankers will begin lowering rates at their meeting that concludes on Sept. 18.
Friday’s report “keeps a September cut on track,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “I don’t think that they are going to pre-commit to it at the July meeting, necessarily, but the pace of inflation has continued to slow.”
Policymakers face a thorny trade-off as they contemplate their next steps on interest rate policy. On one hand, they do not want to cut borrowing costs too soon or too much and risk reigniting economic demand, which would make it easier for companies to continue to raise prices quickly and could make inflation more stubborn. But they are also wary of keeping interest rates too high for too long and hurting the labor market, costing people jobs and wage gains.
That balancing act has become more pertinent as inflation has slowed — making it less of a be-all, end-all priority — and as the unemployment rate has steadily crept up, suggesting that a pronounced slowing in the job market is a real danger.
“As we always say in economics, unemployment goes up like a rocket and down like a feather,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview on July 12.
Economists are closely watching measures of consumer demand as they try to gauge whether economic conditions are about to take a turn for the worse. Because shoppers make up such a big part of the American economy, they are an important barometer of how conditions are evolving.
When it comes to the consumer, recent data points have offered encouraging news. Friday’s report suggested that consumers continued to spend at a healthy pace in June. Consumption picked up by 0.3 percent from a month earlier, and May spending data were revised up.
That came on the heels of a very positive second-quarter gross domestic product report on Thursday. That data suggested that the economy is still expanding at a solid pace as households continue to open their wallets and businesses invest.
The resilient consumption has come as a surprise to many economists, who have been watching for spenders to pull back as credit delinquency data and company anecdotes suggest that at least lower-income groups are feeling strain.
“Every time I think we’re there, some data point comes out and says, actually, the consumer is looking pretty good,” said Nela Richardson, chief economist at payroll processor and data provider ADP.