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June's PCE inflation numbers unlikely to disrupt Fed's rate hike game plan


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June's PCE inflation numbers unlikely to disrupt Fed's rate hike game plan

The Federal Reserve's favorite inflation indicator remained virtually unchanged in June, likely leaving the central bank on course for an additional rate hike in December.

Excluding food and energy prices, the personal consumption expenditure price index increased by 0.1% in June compared to May, according to the Bureau of Economic Analysis at the U.S. Department of Commerce. In annual terms, core PCE inflation remained at 1.5%, unchanged from May.

While the Fed's favored measure of the rate of price increases remained below its longer-term target of 2%, the central bank will be confident the trend is upwards, analysts said.

"Our forecast, and that of the [Federal Open Market Committee's (FOMC)], is that these inflation measures will start to accelerate in the second half of the year," said Michael Brown, an economist at Wells Fargo Securities. "I'm skeptical we get to 2%, but I think these measures will at least be trending in the right direction and provide support for a rate hike in December."

June's PCE report follows statements from the Fed at the end of July indicating that it will start the process of running off some of its $4.5 trillion balance sheet "relatively soon."

"The inflation data certainly keeps the Fed on course with their policy of gradualism," said Chris Rupkey, chief financial economist at MUFG. "What that means for the months ahead, at least this year, is the official start of the wind down on September 20 and then the final of three rate hikes at the end of the year in December."

Rupkey said inflation would need to dip significantly in order for the Fed to question its plan of action.

"If core inflation were to soften and come down to 0.7 or 0.8 year over year, that might make them question what they're doing, but we're not there yet," he said. "I don't think we're going there. We have no reason to expect that, really."

But some Fed members have expressed concern regarding interest rate increases, including Federal Reserve Bank of Philadelphia President Patrick Harker, who said last month he was in "wait-and-see mode" regarding inflation. Brown said FOMC members "want to have maximum flexibility."

"When we're taking a look at this scenario, going into this fall, they are going to talk out of both sides of their mouths," he said. "If we get to this fall and we're still seeing these soft inflation prints, they want to have the option of deferring that rate hike until next year."