A key US Federal Reserve indicator revealed in June that inflation had somewhat decreased from a year earlier, paving the path for the much-anticipated interest rate drop in September.

According to Dow Jones estimates, the personal consumption expenditures price index rose 0.1% on the month and 2.5% from a year ago on Friday, according to a report released by the Commerce Department. May’s year-over-year increase was 2.6%, while the monthly measure remained the same.

The PCE index is the primary benchmark used by Fed policymakers to assess inflation, which is still over the bank’s long-term objective of 2%.

Core inflation, which does not include food and energy, increased by 2.6% annually and by 0.2% monthly, both of which were in line with projections.

Because the price of food and petrol tends to change more than other commodities, policymakers place even more emphasis on core as a stronger indicator of longer-term trends.

Treasury rates decreased in response to the news, and Wall Street stock market futures pointed to a bullish start. The path of interest rate decreases by the Fed is priced more aggressively in futures markets.

“‘Good enough’ is how I would sum up the report in two words,” said Robert Frick, corporate economist of Navy Federal Credit Union. “The level of PCE inflation is high enough to make the Fed’s decision to lower rates easy, and spending and income are both sufficient to sustain the expansion.”

While services had a 0.2% monthly gain, goods prices decreased by 0.2%. June saw a 0.3% increase in housing-related costs, a modest slowdown from the 0.4% increases seen in the previous three months and the lowest monthly growth since at least January 2023.

Additionally, the data showed that personal income increased by just 0.2%, less than the predicted 0.4%. Spending grew by 0.3%, as anticipated.

With consumption being somewhat stable, the savings rate dropped to 3.4%, the lowest since November 2022.

The markets are closely monitoring the Fed’s monetary policy direction when the report is released.

The Federal Open Market Committee, which sets interest rates, is not expected to take any action during its policy meeting on Tuesday and Wednesday of next week.

Market pricing, however, is strongly suggesting that rates will be lowered at the September meeting—the first since the early stages of the Covid epidemic.

“All things considered, the Fed’s week has gone well. According to Chris Larkin, managing director of trading and investment at E-Trade Morgan Stanley, “the economy looks to be on solid ground, and PCE inflation essentially remained steady.” However, a rate decrease next week is still unlikely. Furthermore, the figures have been going in the Fed’s way, even though there is still plenty of time for the economic situation to shift before the FOMC meeting in September.

The Fed started a string of aggressive rate rises in mid-2022, when inflation reached its highest point in almost 40 years and its benchmark borrowing rate reached its highest point in around 23 years. But for the last year, the Fed has been in stop mode while it assesses data that has been showing signs of shifting. While earlier this year’s data indicated a revival in inflation, more recent data has shown a steady cooling, which has many policymakers talking about the possibility of at least one reduction this year.

According to the CME Group’s FedWatch measure, futures markets have put in almost a 90% possibility of a September decrease followed by cuts at both the November and December FOMC meetings.

However, Fed representatives have been circumspect in their statements, emphasising that evidence will always lead policy decisions rather than a predetermined course.

(Adapted from NBCNews.com)

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