The Fed’s Preferred Inflation Measure Cooled in June

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 food and fuel — both of which jump around — 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 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 by 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. The Fed’s staff even revised its forecast at the central bank’s meeting this week, and is no longer calling for a downturn this year.

Yet policymakers remain watchful, because the same resilience that is encouraging optimism now could lay the groundwork for stubborn inflation later. If companies can continue to raise prices because their customers are in good financial shape and are able and willing to pay more without pulling back, it could keep inflation more rapid than is typical.

“The overall resilience of the economy — the fact that we’ve been able to achieve disinflation so far” is “a good thing,” Jerome H. Powell, the Fed chair, said during a news conference this week. Still, “at the margin, stronger growth could lead, over time, to higher inflation, and that would require an appropriate response from monetary policy.”

Much of the recent disinflation has come as unusual shifts that took place during and after the pandemic have slowly faded. Supply chain disruptions have healed, allowing a pop in the price of goods like furniture to disappear. Prices for new cars, which were so scarce that they increased sharply in price, are finally cooling.

And after plummeting at the start of the pandemic and then surging back, airfares and hotel prices have been either declining or are growing at a more normal pace, which is also helping inflation to cool.

Gas prices have also moderated in recent months, which has helped to lower overall inflation. But they have risen in recent days amid a major refinery shutdown, a trend that could slow future disinflation if it persists into August.

Mr. Sharif said he expects inflation to remain slower over the next three months after stripping out fuel and food, a development that could prompt Fed officials to hold off raising interest rates again at their Sept. 20 meeting.

But he expects that policymakers will leave the door open to moves after that, wary that inflation could still pick up again in coming reports, which are often called data prints.

“We could get three prints that are softer — but what about prints 4, 5 and 6?” he said. “It’s not a given just yet.”