PCE inflation, or the Personal Consumption Expenditures Index, is a measure of the prices of goods and services purchased by consumers in the United States. It is known to be the Federal Reserve’s preferred data to assess inflation and determine whether or not to increase or cut interest rates.
The Bureau of Economic Analysis, the agency in charge of tracking and analyzing macroeconomic conditions, indicated that inflation showed signs of cooling in June. As of July 28, 2023, the current inflation rate in the United States is 2.97%. Inflation has officially entered the 2% range and continues its downward trajectory to the official 2% target.
According to the Department of Commerce, the personal consumption expenditures price index excluding food and energy increased 0.2% from the previous month, in line with the Dow Jones estimates. Thus, the core PCE index showed prices increased 4.1% in June from the year before.
The data reinforces other recent releases showing that, at least compared to the soaring inflation from a year ago, prices have begun to ease, according to CNBC. CPI is showing a slower rise in inflation, while consumer expectations are also coming back in line with long-term trends.
S&P 500
source: Yahoo Finance
The continued decline in inflation leads to a rise in futures. According to Yahoo Finance, futures on the Dow Jones were up 0.5% after the benchmark failed on Thursday to add to its longest run of wins since 1987. The S&P 500 futures added 0.7%, while tech-heavy Nasdaq 100 futures climbed 1.1% after all the major gauges closed in the red on Thursday.
Inflation may have cooled off and the likelihood to have a recession is no longer imminent, but the Federal Reserve remains careful about consumer spending. The consistent decline in inflation will certainly affect the Fed's decision in September about interest rates. Now inflation is significantly low enough, the Federal Reserve is less likely to raise interest rates if inflation is low. This can make it cheaper for businesses to borrow money, which can lead to higher corporate profits and higher stock prices.
Price stability will encourage consumers to spend on discretionary items, such as stocks. This can lead to higher demand for stocks and higher stock prices. As consumers’ confidence in the economy continues to remain positive, this will also increase investors’ confidence, which can also support higher stock prices and keep the market in bullish territories.
But higher consumer spending may make the Fed skeptical as inflation could increase again as a result of it. Jerome Powell previously indicated that the Fed may increase interest rates twice more but the inflation data may force the Fed to pause or even start cutting rates.