US PCE inflation holds steady in June

But doubts linger over the prospect of a September rate cut amid mixed inflation signals

26 July 2024

June’s US core Personal Consumption Expenditures (PCE) inflation reading came in at a slightly higher-than-expected 2.6% growth rate on the previous year, matching May’s rate. The core PCE figure especially matters because it has traditionally been the Federal Reserve’s (Fed) preferred reading of inflation, stripping out the more volatile effects of food and energy from the inflation picture and therefore giving a better indication of what is actually happening to prices.

While this month’s reading is relatively encouraging because it shows inflation stable, despite solid consumer spending, at 2.6% it does not quite give the green light to the Fed to start loosening policy at its September meeting following fresh encouragement from former official Bill Dudley this week. It also appears slightly inconsistent with comments made by Fed Chair Jerome Powell earlier in July that the US economy was back on a “disinflationary path”. So before more hostages to fortune get made, this reading serves to remind market participants that inflation does not always move along trajectories in a linear fashion, while firm narratives in this area of economic policy can easily unwind, to the embarrassment of their originators.

What makes things so challenging today for the disinflationistas is that the US economy is performing strongly and the labour market – as the last non-farm payrolls showed – is in good shape. These are not the traditional pre-requisites for low inflation, and we could easily see a pause in progress or even some upside surprises in the inflation journey from here. For the Fed, yet more datapoints will therefore be needed ahead of the Jackson Hole meeting in late August when markets will likely demand an unequivocal stance on the long-running question of when post-pandemic US monetary policy can finally be eased.