PCE Eases Path to Rate Cut

Key Takeaways

• The personal consumption expenditures (PCE) price index is up 2.5% from a year ago
• Core inflation, excluding food and energy, rose 2.6% annually
• Personal income rose 0.2%, below estimates, while spending increased 0.3%, meeting forecasts, with the savings rate dropping to 3.4%.

Inflation Trends and Economic Indicators

The Federal Reserve’s key inflation gauge, the personal consumption expenditures (PCE) price index, showed a modest increase of 0.1% in June and a 2.5% rise from a year ago. This slight decline from the previous month’s 2.6% year-over-year increase indicates a gradual easing of inflation pressures. Core inflation, which excludes volatile food and energy prices, also showed a steady increase of 0.2% month-over-month and 2.6% annually, providing a clearer picture of longer-term inflation trends.

Personal income rose by 0.2%, falling short of the 0.4% estimate, while spending increased by 0.3%, meeting expectations. Despite the solid spending numbers, the personal savings rate dropped to 3.4%, the lowest level since November 2022. These economic indicators suggest a stable yet cautious economic environment, with the potential for the Federal Reserve to consider rate cuts in the near future.

What The Street Expects

Understanding how the street views today’s data can give us a glimpse into what might happen next with interest rates. Below, analysts from several major banks chime in with their thoughts on the PCE report and what it means for future Federal Reserve decisions.

C (Citi): “We continue to expect Fed officials to begin a series of rate cuts starting in September.”

WFC (Wells Fargo): “Today’s report on June personal income and spending is the last major indicator before next week’s Fed meeting and while there is plenty to unpack, there is nothing that compels a rate cut at the July meeting or that prevents one in September.”

BAC (Bank of America): “The June personal income and outlays report was another tick of the box. Inflation is back on track towards the 2% target even if base effects will lift the y/y rate in 2H. Therefore, the likelihood of rate cuts continues to increase.

“That said, solid spending and strong GDP growth means the Fed can be patient and await more data. We remain comfortable with our forecast that cuts will start in December, but upcoming inflation and employment data could tip the scale to an earlier cut. Focus now shifts to July data.”