The Fed’s favorite inflation measure cooled down even further in June

Minneapolis
CNN
 — 

Another key economic report further propped up the idea that a soft landing is not only possible, but also in motion: The Federal Reserve’s preferred inflation gauge continued its deceleration in June while consumers kept the US economic engine running.

Commerce Department data released Friday showed that the Personal Consumption Expenditures price index rose 3% for the 12 months ended in June, easing for the second-consecutive month and stepping back from May’s 3.8% increase.

When stripping out energy and food prices, the core PCE index showed prices increased 4.1% in June from the year before. Economists were expecting the core index to increase 4.2% on an annual basis. In May, the core PCE rose 4.6% annually.

The Fed uses the core PCE index as the benchmark for its 2% inflation target.

On a monthly basis, the headline and core indexes both rose 0.2%.

Friday’s data “does give support to the idea that we’re in the midst of a soft landing” in bringing down inflation without causing a recession, Kathy Bostjancic, chief economist for Nationwide Mutual, told CNN. “That said, it’s still elevated. At 4.1%, we’re more than double the target 2% inflation that the Fed’s looking to eventually reach.”

And that — combined with continued strength in consumer activity — means the Fed might still keep its foot hovering above that gas pedal. Earlier this week, the US central bank raised rates by a quarter point, taking them to the highest level in 22 years.

“It’s going to keep them still leaning hawkish,” she said of Fed officials. “They’re still going to be vigilant, but it’s certainly welcome news.”

The PCE indexes are part of the Personal Income and Outlays report, which provides a more comprehensive look at shifts in prices, including how consumers respond to them and how much consumers are spending, bringing in and saving.

Personal incomes ticked up 0.4% in June, staying somewhat consistent with increases seen since February, while the personal savings rate ticked down to 4.3% from 4.6%.

Friday’s report also showed that consumer spending picked up in June by 0.5%, representing a resurgence from a more moderate pace seen during the prior four months. In May, spending ticked up by a revised 0.2%.

When adjusting for inflation, spending increased 0.4%, driven by a surge in goods-related purchases, specifically of new trucks and recreational products and vehicles, according to the report.

“It just demonstrates consumers’ resiliency, the fact that they’re continuing to spend at such a robust clip on goods as patterns are shifting back toward normal and services are becoming a larger portion of consumption,” said Shannon Seery, economist for Wells Fargo. “I think a lot of people have been waiting for the shoe to drop in goods consumption, but we’re really not seeing that pan out.”

Friday’s spending data provides a fuller picture at what was hinted in the second-quarter GDP report issued Thursday: The economy grew stronger than expected and while consumers did rein in some spending from earlier in the year.

Still, the spending uptick seen in June could mean a strong start to the third quarter, Seery said.

To what extent that momentum is just enough to keep the economy churning while not being too strong to fuel inflation remains to be seen, she added.

“It’s sort of circular, where a tight labor market is keeping consumers spending, and that’s keeping the economy floating, but that also keeps the heat on the Fed,” she said. “I think the Fed is looking at this report and maybe not saying, ‘We have to do more immediately,’ but obviously taking it as an indication that they’re going to have to remain at that upper bound for quite some time.”