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Inflation is ebbing and compensation is rising, new economic data shows

by Taylor Giorno - 07/28/23 11:55 AM ET

A trove of economic data released Friday provides the latest evidence that price pressures are easing across the U.S. economy.

The personal consumption expenditures (PCE) index rose 3 percent from June 2022 to June 2023, down from a 3.8 percent annual increase in May, the Commerce Department announced.

Core PCE, which excludes more volatile food and energy costs, cooled from 4.6 percent year-over-year in May to 4.1 percent in June.

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“Today’s PCE, the [Federal Reserve] preferred measure of inflation, came in softer than expected to top off a full week chock full of economic data that all points to a higher probability of a soft landing,” said Gina Bolvin, president of Bolvin Wealth Management Group.

Federal Reserve Chairman Jerome Powell attends a meeting at the Spain's Central Bank in Madrid, Spain, Thursday, June 29, 2023. Federal Reserve Chair Jerome Powell says the central bank may have to tighten its oversight of the American financial system after the failure of three large U.S. banks this spring. (AP Photo/Manu Fernandez) — Federal Reserve Chairman Jerome Powell attends a meeting at Spain’s Central Bank in Madrid, Spain, June 29, 2023. Powell said the central bank may have to tighten its oversight of the American financial system after the failure of three large U.S. banks this spring. (AP Photo/Manu Fernandez)

U.S. labor costs also rose 1 percent from the first to the second quarter of 2023, slightly down from a 1.2 percent increase the previous quarter, according to new employment cost index (ECI) data released by the Department of Labor Friday.

Total compensation for civilian and private industry workers was up 4.5 percent over the past year, a step down from 4.8 percent annual rate reported at the end of the first quarter. State and local government workers’ compensation stayed steady at 4.9 percent annually at the end of the first and second quarters.

Fed officials were privately divided despite unanimous vote to pause rate hikes

As the Fed weighs whether to raise interest rates again at its September meeting, Federal Reserve Board Chairman Jerome Powell told reporters Wednesday it would be watching a number of indicators, including PCE and employment cost data.

“People are getting hired, many people are going back to work, getting wages, spending money, and that’s really what’s driving the economy, but that is gradually slowing,” Powell said Wednesday. “That’s a good prescription for getting where we want to get.”

The Fed raised interest rates again Wednesday to their highest level in 22 years — its 11th increase since March 2022 — as it aims to bring inflation down to the target rate of 2 percent.

Inflation, which peaked at 9.1 percent year-over-year last June, cooled to 3 percent according to the June 2023 consumer price index (CPI) released by the Labor Department earlier this month.

Powell told reporters Wednesday that while the June CPI data was a welcome sign, it was just one report for one month and indicated he’s not ready to change course just yet.

“Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2 percent has a long way to go,” Powell said.