What happened: The Personal Consumption Expenditures (PCE) price index rose 0.2% in June after increasing 0.1% in May. Core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.2% month-over-month. The annual increase in the headline PCE price index fell slightly below 3%, its slowest advance since March 2021. The annual increase in Core PCE remains high at 4.1%. That’s down from 4.6% in May, but still more than double the Fed’s 2% target.
What it means: Today’s numbers show annual inflation, including the stickiest components of the PCE price index, eased in June. Spending on services continued to moderate. A rapidly expanding services sector and its impact on price growth was a big concern for the Federal Reserve at the end of 2022, but a continued slowdown and more rapid disinflation could give the Fed additional grounds to put an end to the current tightening cycle.
Zillow Senior Economist Orphe Divounguy’s perspective: Today’s release was encouraging and further evidence that inflation is receding. It takes time for changes in monetary policy to have an impact on the economy. To that end, some oft-cited economic guideposts indicate monetary policy is now in restrictive territory, suggesting that core inflation should continue to fall further towards the Fed’s target.
The yield on the 10-year Treasury fell on the news. Longer term interest rates depend on current inflation, inflation expectations and the economic outlook. More rapid disinflation means mortgage rates may have already found their peak. However, a resilient labor market and the uptick in economic activity in recent months point to long-term interest rates – and mortgage rates – remaining high for longer.
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