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Fed's preferred inflation measure shows cooling price increases in June

The Federal Reserve's preferred inflation metric grew in June at its slowest annual rate since September 2021.

The Personal Consumption Expenditures (PCE) Index grew 3.0% year over year in June, down from 3.8% the month prior and in line with expectations. "Core" PCE, which excludes the volatile food and energy categories, grew 4.1%, down from 4.6% from the month prior and below the 4.2% economists surveyed by Bloomberg had expected.

Core PCE is the inflation measurement most often mentioned by Federal Reserve Chair Jerome Powell, who noted on Wednesday that inflation remains "well above our longer-run goal of 2%." The comments came after the Fed raised interest rates to a new range of 5.25%-5.50%, the highest level since March 2001, in an effort to tame inflation.

"Inflation is moving in the direction that will be liked by the Fed," Wells Fargo senior economist Tim Quinlan wrote on Friday.

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The positive inflation print came as a report from the Bureau of Labor Statistics showed wage growth slowed in the second quarter. Wages and salaries increased 4.6% in the three-month period from April to June after rising 5.1% in the first three months of the year. Wages, which if elevated could keep inflation high, according to economists, rose at their slowest pace since the fourth quarter of 2021.

"We think the wage growth will slow further as economic growth slows, allowing the Fed to hold rates steady after this week's rate hike, but the risk is still tilted toward additional rate increases," Oxford Economics lead US economist Nancy Vanden Houten wrote on Friday.

June's PCE reading falls in line with the month's Consumer Prices Index, another inflation measure, which also showed cooling price increases. June's CPI report showed headline inflation was 3% in June as well.

Powell noted Wednesday the tick lower in headline inflation could be a tailwind for the Central Bank's battle with price stability.

"It is a good thing headline inflation has gone down a bit," Powell said. "I would say that having headline inflation move down that much ... will strengthen the broad sense that the public has that inflation is coming down, which will, in turn, we hope, help inflation continue to move down."

Friday's economic reports nudged futures markets tied to the Fed's benchmark interest rate. Investors are currently pricing in a 18% chance of a rate hike in September, per the CME FedWatch tool, down from 22% on Thursday.

On Wednesday, Powell didn't point to whether the September Fed meeting will bring another interest rate hike. There's still plenty of data points between now and then, he noted, including two monthly labor reports and another print on inflation.

"All of that information is going to inform our decision as we go into that meeting," Powell said. "I would say it is certainly possible that we would raise funds again at the September meeting, if the data warranted, and I would also say it's possible that we would choose to hold steady at that meeting.

Jerome Powell smiles after taking the oath of office for his second term as Chair of the Board of Governors of the Federal Reserve System at the Federal Reserve Building in Washington, DC, on May 23, 2022. (Photo by OLIVIER DOULIERY / AFP) (Photo by OLIVIER DOULIERY/AFP via Getty Images)
Jerome Powell smiles after taking the oath of office for his second term as Chair of the Board of Governors of the Federal Reserve System at the Federal Reserve Building in Washington, DC, on May 23, 2022. (OLIVIER DOULIERY/AFP via Getty Images) (OLIVIER DOULIERY via Getty Images)

Josh Schafer is a reporter for Yahoo Finance.

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