The third inflation report of the month, and quite possibly the most important, confirmed inflation is making progress and moving lower. Or at least it is not moving higher. The personal consumption expenditure index (PCE) for May was lower than previous readings on all fronts. Both headline and core monthly rates were the lowest in six months, flat and 0.1%, respectively. Much of the improvement came from lower gasoline and durable goods prices. Core PCE year-over-year, the Fed’s preferred inflation measure, dropped to 2.6% from 2.8%. This is the lowest level in over three years. Supercore PCE, the sub-index Federal Reserve Chair Jerome Powell focuses on, rose 0.1%, the smallest increase since October 2023. All components except health care and food services were lower in May. These components, along with housing, may take longer to adjust lower but are showing signs of slowing.

Overall, the PCE report suggests inflation is moving in the right direction and should give Federal Reserve officials the added confidence they need to consider a rate cut this year.

Housing – It was disappointing to have sales of existing homes fall for the third month in a row in May and construction of new homes at the weakest pace since 2020. But when you add in the biggest monthly drop in new home sales in almost two years, the signs are clear – the housing market has stalled. Sales of new homes fell 11.3% in May and are down over 16% from a year ago. Whereas a lack of inventory in previously owned homes is one reason for falling sales, the opposite is the case for new homes. The supply of already built new homes is at the highest level since the financial crisis in 2008. With homebuyers holding off making a purchase because of high prices and mortgage rates, homebuilders are opting for selling what is built over beginning new construction.

GDP – Old news or not, the third estimate of first quarter economic growth remains important. The overall growth rate increased from 1.3% to 1.4%, a slight improvement but still the slowest pace in two years. The underlying components shifted more significantly. Consumer spending was revised lower to 1.5%, a full point below the original report. The weakness was offset by a rebound in business investment to 4.4% from the original estimate of 3.2%. Strong as this may be, it is unlikely the business component will be sustainable. Imports continue to outpace exports, pushing the merchandise trade gap to the widest level in two years. This negatively impacts growth. Lastly, the price index moved back to 3.1%, almost double the level in the fourth quarter. The Atlanta FedNow estimate for second quarter GDP is 2.7%, down an earlier forecast of 3.0%.