The Federal Reserve’s preferred measure of inflation increased 2.5% in June compared to a year ago, in line with market expectations — boosting hopes for a September rate cut.
The Personal Consumption Expenditures index (PCE) ticked up 0.1% on a monthly basis in June, while Core PCE, which strips out volatile food and energy prices, was up 0.2% compared to May, the Commerce Department reported Friday.
The latest data fueled growing optimism that the Fed will start cutting 23-year-high interest rates in September and comes ahead of next week’s two-day Fed meeting.
Dow futures were up more than 260 points while Nasdaq and S&P 500 futures were also up substantially.
The Commerce Department on Thursday released data showing that the economy continues to grow at a robust rate — defying predictions of a slowdown from some observers.
The nation’s economy accelerated last quarter at a strong 2.8% annual pace, with consumers and businesses helping drive growth despite the pressure of continually high interest rates.
Thursday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — picked up in the April-June quarter after growing at a 1.4% pace in the January-March period.
Economists had expected a weaker 1.9% annual pace of growth.
The GDP report also showed that inflation continues to ease, while still remaining above the Federal Reserve’s 2% target.
The PCE rose at a 2.6% annual rate last quarter, down from 3.4% in the first quarter of the year. Excluding volatile food and energy prices, so-called core PCE inflation increased at a 2.9% pace.
That was down from 3.7% from January through March.
The latest figures should reinforce confidence that the US economy is on the verge of achieving a rare “soft landing,” whereby high interest rates, engineered by the Fed, tame inflation without tipping the economy into a recession.
Helping boost last quarter’s expansion was consumer spending, the heart of the US economy.
It rose at a 2.3% annual rate in the April-June quarter, up from a 1.5% pace in the January-March period.
Spending on goods, such as cars and appliances, increased at a 2.5% rate after falling at a 2.3% pace in the first three months of the year.
Business investment was up last quarter, led by a 11.6% annual increase in equipment investment. Growth also picked up because businesses increased their inventories.
On the other hand, a surge in imports, which are subtracted from GDP, shaved about 0.9 percentage point from the April-June growth.
Fed officials have made clear that with inflation edging toward their 2% target level, they’re prepared to start cutting interest rates soon, something they’re widely expected to do in September.
The state of the economy has seized Americans’ attention as the presidential campaign has intensified. Though inflation has slowed sharply, to 3% from 9.1% in 2022, prices remain well above their pre-pandemic levels.
This year’s economic slowdown reflects, in large part, the much higher borrowing rates for home and auto loans, credit cards and many business loans resulting from the Fed’s aggressive series of interest rate hikes.
The Fed’s rate hikes — 11 of them in 2022 and 2023 — were a response to the flare-up in inflation that began in the spring of 2021 as the economy rebounded with unexpected speed from the COVID-19 recession, causing severe supply shortages.
Russia’s invasion of Ukraine in February 2022 made things worse by inflating prices for the energy and grains the world depends on. Prices spiked across the country and the world.
Economists had long predicted that the higher borrowing costs would tip the United States into recession. Yet the economy kept chugging along.
Consumers, whose spending accounts for roughly 70% of GDP, kept buying things, emboldened by a strong job market and savings they had built up during the COVID-19 lockdowns.
