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The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation metric, came in even lower than expected. Here’s a breakdown of the latest PCE-inflation update from May:
- Headline PCE grew 2.6% year-over-year, down from April’s 2.7%.
- Core PCE grew 2.6% year-over-year, down from April’s 2.8%.
- After rising 0.3% in April, PCE was actually flat on a monthly basis in May. This marks the first time consumer prices didn’t go up in six months.
In addition to the PCE report, two other important pieces of economic news came in this week—indicating that the economy is flashing “on trend” rather than “recession.”
- First, there were 8.1 million job openings in May, up slightly from 7.9 million in April and redolent of the jobs market of 2019.
- Second, the Atlanta Fed forecast that GDP will grow by 1.5% in Q2 2024 while reporting business expectations of inflation growth are very low.
Our take
Due to the presidential debate, these bits of economic news didn’t get much play but all three reports are extremely important and portend very good news in our fight against inflation. Take the job openings report, for example. One source of inflation pessimism was the high ratio of job openings to unemployed workers. That issue has now gone away, with unemployment still very low.
Secondly, as the PCE report indicates, underlying inflation is low and on pace to achieve the Fed’s goal of 2%. Lastly, GDP is expected to grow without inflation expectations becoming entrenched. All this very much indicates that the Fed is likely to cut interest rates in September, which only bodes well for housing affordability. The next PCE inflation report drops on July 26, just ahead of the next rate-setting Fed meeting on July 30-31.