Fed Waits for Good News! US June PCE Unexpectedly Turns Negative, Core Inflation at 3.3%

The inflation gauge most closely watched by the Federal Reserve (Fed) cooled in June, with the overall Personal Consumption Expenditures (PCE) price index posting its first monthly decline since April 2020, when the COVID-19 pandemic erupted. However, the year-on-year rate remains well above the 2% target, indicating that price pressures in the US economy have not fully subsided.

The US Department of Commerce reported on Thursday (30th) that the June PCE price index fell 0.1% month-on-month, primarily driven by declining energy prices. The year-on-year rate dropped from 4.1% in May to 3.7%.

The Fed’s preferred inflation measure cooled in June, with the overall PCE price index recording its first monthly decline since the onset of the pandemic in April 2020. (Image: ZeroHedge)

Excluding volatile food and energy components, the core PCE rose 0.1% month-on-month in June, below the market expectation of 0.2%. The year-on-year rate also declined from 3.4% in May to 3.3%. On a component basis, service prices remained the primary driver of price increases, indicating that some inflationary pressures remain stubborn.

Core PCE rose 0.1% month-on-month in June, below the expected 0.2%; the year-on-year rate fell from 3.4% to 3.3%. (Image: ZeroHedge)

PCE data typically does not trigger sharp financial market moves on its own, as it incorporates much of the inflation data previously released by the US Labor Department, allowing traders to anticipate the outcome. However, PCE is the most important price gauge for the Fed when setting monetary policy, making it a key reference for assessing interest rate trajectories.

The Fed held rates steady yesterday, refraining from a rate hike—the first in three years—amid concerns from some market participants. Chair Kevin Warsh stated that the Fed remains committed to bringing inflation back to the 2% target, but recent increases in market interest rates have given policymakers more room for observation.

Nevertheless, three out of twelve voting officials advocated for a rate hike, and the sharp rise in long-term Treasury yields suggests growing pressure on the Fed to further suppress inflation. After June, tensions between the US and Iran flared up again, pushing oil prices higher. Whether rising energy costs will reignite inflation remains a key variable in the coming months.

On the same day, it was reported that US personal income in June rose 0.2% month-on-month, slightly below the 0.3% forecast by economists surveyed by The Wall Street Journal (WSJ). Personal consumption expenditures rose 0.3% month-on-month, in line with market expectations, indicating that US consumer demand remains resilient.