Numbers give hope on fate of inflation

Measure preferred by the Fed cools

The Federal Reserve’s preferred inflation gauge cooled in June even as consumer spending chugged along more quickly than economists had expected.

The data illustrate that the economy retains substantial momentum 16 months into the central bank’s campaign to slow it down. That could improve the chances of a soft landing — in which inflation comes down without a recession — though Fed officials have been clear that it is too early to feel confident that inflation will slow completely.

The personal consumption expenditures index climbed 3 percent in the year through June, data released Friday showed, in line with what economists had expected. That was a slowdown from 3.8 percent the month before.

After stripping out volatile food and fuel prices, a core inflation index climbed by 4.1 percent, slightly less than economists had expected. That is down notably from a peak of 5.4 percent in 2022, and it was the lowest reading since September 2021.

Inflation has begun gradually moderating in recent months, good news for consumers and for Fed officials, who have been raising interest rates to try to cool the economy and wrestle price increases back under control. Policymakers lifted rates to a 5.25 percent to 5.5 percent range this week, the highest level since 2001, and signaled that they are open to doing more if incoming data suggest that inflation is likely to last.

Fed policymakers have been closely watching core inflation in particular, because it strips out volatile data to give a better sense of where inflation might be headed. Officials aim for 2 percent inflation on average, so that key price measure is still about twice as fast as their goal.

Still, the recent progress has been a welcome development, especially because the economy has held up even as price increases begin to slow. The resilience has been fueled by consumers, who have continued to spend even as it becomes more expensive to borrow for a car or credit card purchase. Friday’s report showed that personal consumption spending picked up 0.4 percent in June from the previous month after adjusting for inflation, more than the 0.3 percent that economists had expected.

“It’s a good number,” Omair Sharif, founder of Inflation Insights, said of the price report. “This is kind of the leading edge of the softness that the Fed wants to see.”

Slowing inflation and solid economic data have combined to stoke a growing sense of optimism among economists: It seems increasingly possible that the Fed might be able to cool the economy just enough to bring inflation under control without hurting it so much that unemployment spikes and growth contracts sharply.

Yet policymakers remain watchful, because the same resilience that is encouraging optimism now could lay the groundwork for stubborn inflation later.