June consumer spending: Key Fed inflation gauge lowest in two years

July 28 (UPI) -- Consumer-level prices in the U.S. economy, an inflation gauge watched closely by the Federal Reserve, expanded by its slowest pace since early 2021, but remains above target, the Commerce Department reported Friday.

The Personal Consumption Expenditures price index increased by 3% over the 12-month period to June, a slowdown from the 3.8% reported year-on-year to May.

So-called core PCE, which strips out volatile food and energy prices, showed a 4.1% expansion year-on-year to June, lower than the 4.6% annual reading to May and slightly better than analysts expected.

Disposable personal income, meanwhile, increased by 0.3%, lower than the 0.6% increase month-on-month to February, the Commerce Department reported. Despite recent trends lower for inflation, rates remain above the 2% target rate set by the Fed.

Both figures are net positive, however, for a Federal Reserve working to cool the economy with aggressive rate hikes. The Fed increased its lending rates by another 25 basis points this week, moving the range to a 22-year high.

As it continues to monitor inflation, there's a possibility of yet another interest rate hike ahead. The Fed said it will "continue to assess additional information and its implications for monetary policy."

Vehicle sales and spending on financial services supported the PCE to June. A morning research note from investment bank ING said recent data support the thesis that Federal Reserve policies will likely not lead to a recession this year.

"Consumers continued to spend in respectable moderation in June while inflation data softened further and key labor cost metrics undershot expectations, boosting hopes that inflation can return to target without the need for further Fed rate hikes and a recession," the report read.

Second-quarter GDP expansion in the U.S. economy was higher than the first quarter, supporting the idea that the world's largest economy will avoid a dramatic downturn.