We have said for many months now that inflation is the most important economic factor to watch in 2024. This week we had good news on the inflation front. The Personal Consumption Expenditures Index (“PCE”) for May, which was released on Friday, showed an inflation reading of 2.6% year over year. This is below the 2.7% from the previous month and continued to calm the markets nerves about inflation. The PCE rate, while quoted less than CPI rate in the media, is important since it is the federal reserve's favorite inflation measure.
May’s PCE was largely in line with market expectations but continued to show a moderating of inflation. Encouragingly, the core index, which excludes food and energy, increased by just 0.1% for the month, the lowest increase since November.
The results show that the Federal Reserve’s current actions, including a Federal Funds rate target of 5.25% to 5.5%, are moderating inflation, and we expect inflation to continue trending toward the Federal Reserve’s 2% target as for the remainder of this year.
The key question for stock markets then is, “when the Federal Reserve will cut interest rates”? Despite May’s favorable inflation reading, it is still unlikely that the Federal Reserve will lower rates before the end of the year. Lowering rates early risks a resurgence in inflation, something the Federal Reserve is determined to avoid.
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