New PCE data released Friday shows a welcome slowdown in inflation, boosting the outlook for future Fed rate cuts while strong income and spending levels suggest no rush to cut rates immediately.
Inflation figures came in below expectations, with both headline and core inflation showing minimal increases of -0.01% and 0.08%, respectively, which resulted in year-over-year core and headline PCE inflation falling to 2.6%.
Core goods prices dropped by 0.2%, while core services prices saw a modest rise of 0.2%.
Notably, core services excluding housing—a metric closely watched by Fed Chair Jerome Powell—posted its second-lowest increase in over three years at 0.10%.
Analysts at Bank of America reacted to the latest data, calling it “encouraging on almost all fronts for the Fed.”
“Inflation took a big step down after four consecutive months of uncomfortably high prints. This improves the outlook for rate cuts. Meanwhile, robust income growth and moderate spending suggest there is no urgency to cut for the wrong reasons, i.e. because the economy is slowing sharply.”
Michael Matousek, head trader at U.S. Global Investors (NASDAQ:GROW), highlighted that real PCE rose by 0.3% month-over-month, surpassing expectations and recovering from the previous month's decline.
“This growth in real personal spending (real PCE) was primarily driven by a 0.6% month-over-month increase in spending on goods, which was anticipated by the 0.4% month-over-month rise in May's control-group retail sales,” Matousek noted.
With solid income growth and moderate spending, the economy shows resilience, reducing the immediate need for rate cuts.
“On balance, we remain comfortable with our forecast that cuts will start in December,” Bank of America analysts concluded.