Fed’s key inflation gauge rose 2.5% in June from a year ago, in line with expectations

An important gauge for the Federal Reserve showed inflation eased slightly from a year ago in June, helping to open the way for a widely anticipated September interest rate cut.

The personal consumption expenditures price index increased 0.1% on the month and was up 2.5% from a year ago, in line with Dow Jones estimates, the Commerce Department reported Friday. The year-over-year gain in May was 2.6%, while the monthly measure was unchanged.

Fed officials use the PCE measure as their main baseline to gauge inflation, which continues to run above the central bank’s 2% long-range target.

Core inflation, which excludes food and energy, showed a monthly increase of 0.2% and 2.6% on the year, both also in line with expectations. Policymakers tend to focus even more on core as a better gauge of longer-run trends as gas and groceries costs tend to fluctuate more than other items.

Goods prices fell 0.2% on the month, while services increased 0.2%. Housing-related prices in June rose 0.3%, a slight deceleration from the 0.4% increase in each of the last three months and the smallest monthly gain going back at least to January 2023.

The report also indicated that personal income rose just 0.2%, below the 0.4% estimate. Spending increased 0.3%, meeting the forecast.

The report comes with markets paying close attention to which way the Fed is headed on monetary policy.

There’s little expectation that the rate-setting Federal Open Market Committee will make any moves at its policy meeting next Tuesday and Wednesday. However, market pricing is pointing strongly to a rate cut at the September meeting, which would be the first reduction since the early days of the Covid pandemic.

As inflation rose to its highest level in more than 40 years in mid-2022, the Fed embarked on a series of aggressive hikes that took its benchmark borrowing rate to its highest level in some 23 years. However, the Fed has been pause for the past year as it evaluates fluctuating data that earlier this year showed a resurgence in inflation but lately has showed a gradual cooling that has many policymakers discussing the likelihood of at least one cut this year.

Futures markets have priced in about a 90% chance of a September reduction followed by cuts at both the November and December FOMC meetings, according to the CME Group’s FedWatch measure.

Fed officials, though, have been cautious in their remarks and have stressed that there is no set policy path, with data guiding the way.

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