Fed’s preferred inflation gauge shows prices rose at slowest pace since March 2021

The latest reading of the Fed’s preferred inflation gauge showed prices increased slightly more than expected in June.

The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.6% over the prior year in June; above economists’ estimate of a 2.5% increase and unchanged from the month prior. Still, the print marked the slowest annual increase for core PCE in more than three years.

Core PCE rose 0.2 % from the prior month, in line with Wall Street’s expectations for 0.2% and faster than the 0.1% increase seen in May.

“It is another bit of evidence for the Fed to say, yes, the upside that we saw on inflation the first quarter was largely an aberration,” BofA Securities head of US Economics Michael Gapen told Yahoo Finance. “It did not break the disinflation trend. Inflation appears to be decelerating, gradually, in the direction that the Fed wants.”

Nationwide chief economist Kathy Bostjancic described Friday’s PCE print as “benign.” Bostjancic added the data provides “clear support” for the Fed to begin cutting interest rates in September.

The report follows recent promising inflation prints. The most recent reading of the Consumer Price Index (CPI) showed core prices climbed 0.1% from the prior month, lower than economists’ estimates.

Ahead of Friday’s PCE release, Federal Reserve Chair Jerome Powell noted recent inflation data “[adds] somewhat to confidence” inflation is moving toward the Fed’s 2% target. The Fed’s next monetary policy decision will come on July 31.

Markets widely expect the Fed will hold interest rates steady at its July meeting before initiating its first interest rate cut in September.