Summary: US core PCE price index up 0.2% in June, in line with expectations; annual rate slows from 4.6% to 4.1%; Barclays: goods’ prices main factor behind reduced price pressures; short-term Treasury yields fall; Fed rate-cut expectations for 2024 firm slightly.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly and remains above the Fed’s target.
The latest figures have now been published by the Bureau of Economic Analysis as part of the June personal income and expenditures report. Core PCE prices rose by 0.2% over the month, in line with expectations but down from May’s 0.3% increase. On a 12-month basis, the core PCE inflation rate slowed from May’s rate of 4.6% to 4.1%.
“Overall, the June PCE price index data were in line with our expectations, with core goods explaining almost all the moderation in core price pressures” said Barclays economist Pooja Sriram. “While the recent slowing in core inflation is welcome news, we think there is further room for progress, especially on the services side, which tends to be more closely linked to wage pressures.”
US Treasury bond yields fell on the day. By the close of business, the 2-year Treasury bond yield had shed 6bps to 4.87%, the 10-year yield had lost 5bps to 3.95% while the 30-year yield finished 3bps lower at 4.01%.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 firmed slightly. At the close of business, contracts implied the effective federal funds rate would average 5.33% in August, in line with the current spot rate, and then increase to an average of 5.35% in September. December futures contracts implied a 5.40% average effective federal funds rate while July 2024 contracts implied 4.915%, 41bps less than the current rate.
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.