The Federal Reserve’s preferred inflation gauge fell in June, as the pace of price growth pulled back amid volatility in energy markets.
US inflation showed clear signs of cooling in Jun-26, with the headline Personal Consumption Expenditures (PCE) price index easing to +3.7%yoy (down from +4.1%yoy in May-26), in line with market consensus. On a monthly basis, headline PCE prices dropped by -0.1%mom (May-26: +0.5%mom) due to a sharp -0.6%mom contraction in goods prices; the steepest monthly drop since Nov-23, alongside a deceleration in services inflation to +0.1mom% (May-26: -0.5%mom).
Meanwhile, the core PCE price index, the Fed’s preferred gauge of inflation, rose by +3.3%yoy (May-26: +3.4%yoy) with a slower monthly rise of +0.1%mom (May-26: +0.3%mom), softer than market expectations of +0.2%mom and providing a welcome moderation in core underlying price pressures.
In a separate release, according to the BEA’s advance estimate, US GDP growth slowed to an annualised +1.5%qoq in 2Q26 (below the +2.1%qoq expected by the market consensus), dragged down by a slower export growth (+4.5%qoq vs 10.9%qoq) and strong imports (+11.5%qoq vs +11.8%qoq), as well as a -0.8%qoq contraction in government spending. Non-residential investment also moderated to +8.4%qoq as structures fell for a tenth straight quarter (-5.0%qoq). However, strong consumer spending provided a major offset, accelerating to +3.2%qoq (1Q26: +0.5%qoq) driven by stronger spending both goods and services.
While softer June PCE data validates the Fed’s decision to hold rates at 3.50–3.75% at the recent FOMC meeting, annual headline PCE (+3.7%yoy) and core PCE (+3.3%yoy) inflation remain well above the +2.0% target. Given the elevated inflation, MBSB believes Fed will maintain hawkish stance for now to anchor inflation expectations, with market continuing to price in a potential rate hike at the upcoming meeting in Sep-26.
