The inflation surge looks to be mostly over, putting Fed rate cuts in play
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One great economic question mark of 2024 has been whether the post-pandemic inflationary episode is well and truly dead or would prove to have more lives than a horror movie monster.
The big picture: Midway through the year, it looks like the monster has indeed been vanquished. Friday morning's new reading of the Fed's preferred inflation measure, the Personal Consumption Expenditures Price Index, confirm as much.
- A spurt of inflation in the first quarter of the year looks to have been more noise than a signal about underlying price trends.
- Accompanying data on incomes and spending out Friday morning points to growth that is solid but not excessive.
Why it matters: That means a Fed rate cut in September looks highly likely, barring a major reversal in inflation data between now and then. Futures markets now imply a certainty of at least a quarter-point rate cut then, and even assign roughly 12% odds to a half-point cut.
- Indeed, assuming the Fed elects not to adjust rates in its policy meeting next week, there's a decent case that it will be behind the curve, given signs of softening growth and continued disinflation.
- At next week's meeting, "we suspect policymakers will have a long and lively debate about whether and how to signal a September rate cut," wrote EY-Parthenon chief economist Gregory Daco in a note. "In fact, some policymakers may even argue, as we have, that a July rate cut would have been optimal and preferable," given conditions.
By the numbers: PCE inflation was 0.1% in June, with core — excluding food and energy — at 0.2%. Over the last year, overall prices are up 2.5% and core prices are up 2.6%.
- The trend is the Fed's friend, with core inflation over the last three months an annualized 2.3%, not far from the Fed's 2% target. That number had spiked to 4.5% in the January through March period and was still at 2.9% for the March through May period.
- Disposable personal income was up 0.2% in June, or 0.1% in inflation-adjusted terms, which is hardly the kind of number you would expect to see in an economy that is still overheated.
Between the lines: Officials were scarred by a disinflationary head-fake in the summer of 2021, which caused Fed leaders to judge that inflation was transitory and there was no need to move quickly to tighten policy.
- That mistake three years ago has made them wary of prematurely cutting rates.
The bottom line: With half a year's data in hand, it is now clear Q1 2024 was an inflation blip, not a re-inflation trend.
