The latest Personal Consumption Expenditures (PCE) price index data for June showed headline inflation easing to 3.7% year-over-year, in line with market expectations and down from the prior reading of 4.1%. Core PCE, which excludes food and energy, came in at 3.3% year-over-year, also matching estimates and down from the previous 3.4%. As the inflation gauge the Fed explicitly targets, these PCE readings carry particular weight in shaping the trajectory of monetary policy.

On a month-over-month basis, headline PCE declined 0.1%, consistent with expectations. The prior month's reading was revised upward to 0.5% from an originally reported 0.4%.

Core PCE rose 0.1% month-over-month, below the 0.2% consensus estimate. The previous month's core MoM figure stood at 0.3%.

PCE excluding food and energy posted a 0.1% reading, compared to 0.3% in the prior month. PCE services prices excluding energy and housing also came in at 0.1%, down sharply from 0.5% the previous month.

Federal Reserve Chair Warsh reiterated that the 2% inflation target remains the benchmark the Fed is monitoring. In its statement, the Federal Open Market Committee said: "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability."

With the core year-over-year rate at 3.3% and headline at 3.7%, both measures remain well above the Fed's 2% objective. The month-over-month trend over the past twelve months suggests that reaching the 2% target could take several more months, provided monthly inflation readings remain subdued at around 0.1%. Achieving that trajectory would likely require oil prices to decline and remain lower; otherwise, energy costs could push inflation higher rather than lower. An alternative scenario in which economic growth slows more sharply could accelerate the disinflationary process.

Source: ForexLive / InvestingLive