The primary Federal Reserve inflation gauge rose at the slowest pace since late 2020 in May, while consumer spending remained sluggish, raising hopes for a September rate cut. The S&P 500 hit a new record on the Fed-friendly data after rallying overnight on an election-shifting presidential debate, but a late-morning rise in Treasury yields halted the advance. The reversal appeared less related to economic data than to the political earthquake at Thursday night's presidential debate.
Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index was unchanged in May, in line with estimates. The 12-month headline inflation rate fell to 2.6%, as expected.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. The core PCE price index rose 0.1% in May, matching forecasts and the smallest increase so far this year.
The 12-month core inflation rate cooled to 2.6%, matching forecasts.
The data looked even better when left unrounded. The core PCE price index rose just 0.8% on the month, the least since November 2020. The 12-month inflation rate fell to 2.57%. Meanwhile, the headline PCE price index, including food and energy, actually dipped 0.01% from April's level.
Personal Income, Spending
The PCE price index is released with the Commerce Department's monthly personal income and outlays report. Personal income rose 0.5%, above 0.4% forecasts. Personal consumption expenditures rose 0.2% in May, trailing 0.3% estimates.
Supercore Services Inflation
The May inflation data also revealed progress in bringing down what Wall Street now calls supercore inflation. This metric unveiled by Federal Reserve chair Jerome Powell in late 2022 measures changes in core service prices excluding housing. This narrower view of price changes was in keeping with the Fed's worry that the tight labor market and elevated wage growth had been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
In May, prices for these core nonhousing services, including health care, haircuts and hospitality, rose just 0.1% on the month, the least since last August. The 12-month supercore services inflation rate dipped to 3.38% from 3.48% in April. The Fed will want to see more progress on this front, though.
More PCE Inflation Details
A look below the surface makes it hard to figure whether the latest tame inflation reading is the start of a trend. The biggest component of the core PCE price index actually came in on the hot side, as health care prices rose 0.7%. Housing costs rose 0.4%.
But those increases were offset by a 0.2% decline in goods prices and some unusual declines in prices of other services. Transportation service prices slid 0.65% amid a drop in airfares. Recreation service prices fell 0.3%, including a 3.9% monthly drop in video streaming service prices. Financial service prices dipped 0.3% as portfolio management costs, which usually climb along with the S&P 500, fell 2.2% on the month.
Federal Reserve Rate-Cut Outlook
After May's core PCE inflation data, market pricing showed 68% odds that the first Fed rate cut will come by the Sept. 18 policy meeting, up from 64% ahead of the report, but the improvement slipped away by day's end. Markets now see 62% odds of two quarter-point rate cuts this year, down from 63.5%.
Recent economic signals including soft retail sales, weak home sales and a modest uptrend in jobless claims have raised expectations that the Fed will pivot to rate cuts at the September meeting.
San Francisco Fed President Mary Daly said in a Monday speech that "the balance between the demand and supply of workers has largely normalized." The Fed has to be on alert because further declines in the demand for labor may show up in higher unemployment, not just fewer job openings.
S&P 500
The S&P 500 pushed into record territory on Friday morning, rising as much as 0.75%, but faded to a 0.4% loss in afternoon stock market action. On Thursday, the S&P 500 edged up 0.1% to finish within 0.1% of an all-time closing high.
The S&P 500 retreated from morning highs as the 10-year Treasury yield bounced to 4.38% after initially slipping to around 4.27% on the tame inflation data.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
