Federal Reserve’s Inflation Measures Indicate Cooling Trend

Federal Reserve’s Inflation Measures Show Signs of Cooling

The Federal Reserve’s preferred inflation gauge continued its gradual decline in June, indicating a slowdown in price increases. This trend persists even as the “core” inflation measure remains unchanged, suggesting that the central bank is on track for a potential rate cut later this year, without creating an immediate sense of urgency for a reduction at their upcoming meeting next week.

The Personal Consumption Expenditures (PCE) index reflected a 2.5 percent increase in June compared to the previous year, which is a slight decrease from May’s 2.6 percent rise and aligns with economists’ predictions. However, the “core” price measure— which excludes the more volatile food and energy sectors— has proven to be more resilient. Year-over-year core inflation remained steady at 2.6 percent, the same as the previous month. Notably, both inflation measures saw a modest increase on a month-to-month basis.

This report serves as a reminder that while inflation has significantly decreased from its peak above 7 percent in 2022, it has not yet been completely subdued. It is important to note that inflation has remained above the Federal Reserve’s target of 2 percent for over three years, a prolonged period that has resulted in persistently high price levels compared to those in 2020. This ongoing situation has frustrated consumers, who are hesitant to accept higher price tags, thereby impacting the economic landscape negatively for incumbent Democrats. They face challenges in garnering positive recognition for a robust job market and substantial infrastructure spending, all while inflation continues to shape voters’ perceptions of the economy.

The extended duration of high inflation has also made the Federal Reserve cautious in its approach. For the past year, policymakers have maintained interest rates at 5.3 percent, a strategy aimed at curbing consumer borrowing and demand to cool the broader economy. While there are signs that inflation is decreasing—suggesting that such high borrowing costs may no longer be necessary—the Fed remains hesitant to lower rates until they are confident that they have successfully managed price increases.