US PCE inflation slows, supports rate cut

The Federal Reserve’s preferred measure of U.S. inflation decelerated in May, bolstering the case for lower interest rates later this year.

By Ahmed Azzam | @3zzamous | 28 June 2024

Market close
  • U.S. PCE price index shows slowest growth in six months

  • Stocks rise, yields fall on Fed rate cut hopes

The U.S. personal consumption expenditure (PCE) price index remained flat in May from April 2024, marking the smallest change in six months. This followed a 0.3% increase in April and aligned with market forecasts. Prices for goods dropped by 0.4%, while prices for services rose by 0.2%. The core PCE index, which excludes food and energy, increased by 0.1%, the smallest rise since November, compared to a 0.3% rise in April, also meeting expectations. Food prices edged up by 0.1%, and energy prices fell by 2.1%. Annually, the PCE rate declined to 2.6%, with core PCE inflation also easing to 2.6%, the lowest since March 2021.

Market reaction

U.S. stock futures climbed and bond yields decreased as the cooler inflation data bolstered expectations for Federal Reserve rate cuts this year. S&P 500 futures pointed to further gains for the benchmark index. The yield on 10-year Treasury notes dropped one basis point to 4.27%. Swap markets are now pricing in about 45 basis points of policy easing in 2024, equivalent to nearly two rate cuts.

Fed outlook

Today's PCE data, while expected, provides relief and will be welcomed by the Fed. However, the future policy path remains uncertain. A further slowdown in inflation, ideally alongside signs of labor market easing, is necessary to justify a rate cut by September.

Richmond Fed President Thomas Barkin emphasized that the battle against inflation isn't over, noting that the U.S. economy is likely to remain robust as long as unemployment stays low and asset valuations high. Barkin made these remarks prior to the release of the PCE data.

Personal spending

Personal spending in the U.S. rose by 0.2% in May 2024 from the previous month, slightly below market expectations of a 0.3% increase. Real consumption expenditure, which adjusts for inflation, increased by 0.3% over the same period.