Monthly Core PCE Inflation:
Data released this week showed that the U.S. Consumer Price Index (CPI) excluding food and energy (the so-called “core” measure) was flat over the month of June, suggesting that the Fed’s preferred inflation gauge, core PCE, is also tracking soft. Is the inflation problem behind us? We hope so, but there are a few reasons to remain cautious. First, while inputs from CPI feed into PCE, the two measures have diverged of late. Second, a lot went right in June CPI, with almost every category surprisingly soft, suggesting June may have been a fluke. Third, we think policymakers will want to see “a string of soft prints” to confirm progress toward 2% and be comfortable with staying on hold. Meanwhile, the bar to a hike is much lower, as policymakers seem ready to pull the trigger if we see another “hot” inflation report. But a stretch of five or more consecutive monthly core PCE prints below 0.25% has occurred only three times since 2020: once in early 2020, before inflation accelerated; once in the second half of 2024; and once in the second half of 2025. So, recording another soft inflation streak is possible, but would you bet on it? More importantly, will policymakers?
