US June PCE Inflation Cools as Core Gauge Falls to 3.3%, Easing Fed Policy Pressure

TradingKey - Data released by the U.S. Commerce Department on Thursday showed that the U.S. Personal Consumption Expenditures (PCE) price index rose 3.7% year-on-year in June, down from 4.1% in May; it fell 0.1% month-on-month, marking the first monthly decline since April 2020, indicating that falling energy prices have driven a significant cooling in overall inflation.

Excluding food and energy prices, the core PCE price index, the Federal Reserve's preferred inflation gauge, rose 0.2% month-on-month, down from 0.3% in May; the year-on-year growth rate slowed to 3.3% from 3.4%. The slowdown in core inflation suggests that price pressures on U.S. goods and services have eased somewhat, but remain significantly above the Fed's 2% long-term inflation target.

The decline in the overall PCE in June was mainly driven by falling energy prices. The previous easing of the U.S.-Iran conflict led to a drop in international oil prices and U.S. gasoline prices from their peaks, relieving the pressure of energy expenses on households. Meanwhile, U.S. personal consumption expenditures grew 0.4% month-on-month in June, slowing from 0.7% in May, indicating that consumer demand continues to grow, though the pace of expansion is cooling.

This report provides some breathing room for the Federal Reserve. The Fed maintained the target range for the federal funds rate at 3.50% to 3.75% this week, but three officials internally supported a 25-basis-point rate hike, reflecting policymakers' continued vigilance against inflation persistently exceeding the target. The cooling PCE data may temporarily weaken market bets on an immediate rate hike, but with core inflation remaining above 3%, the Fed also lacks sufficient grounds to pivot to easing in the near term.

It is worth noting that the June inflation data does not yet fully reflect the impact of the recent escalation in the Middle East conflict and the rebound in international oil prices. If energy costs continue to rise in July, overall inflation could face renewed pressure. Therefore, the market will continue to monitor employment, wage growth, and service sector price performance to determine whether the cooling inflation in June is a structural trend or a temporary phenomenon driven by energy price volatility.