Inflation data fuel markets but economists remain cautious

investmentnews.com:

The financial markets shifted into risk-on mode following inflation data Friday that capped a week of good news for the markets and the economy.

While it’s still too early to speculate on how the Federal Reserve might respond when it meets in September, the message is clear to financial advisors and market watchers:U.S. inflation is on a slowing trend.

“Everything this week has been good for the markets and has raised the probability of a soft landing,” said Jeanette Garretty, chief economist at Robertson Stephens.

“Right now, this is an incredible economy to be able to go through 550 basis points of tightening in the fastest-ever period of time and still moving along the way it is,” she added.

In midday trading Friday, the equity markets rallied following an update on the personal consumption expenditures price index, which fell to its lowest level in two years, indicating the Fed might be gaining some ground in its battle with inflation.

The PCE, a broad measure of personal consumption expenditures closely watched by the Fed, was up 3% in June over the same period a year ago. That compares to the 3.8% year-over-year increase in May.

On a monthly basis, prices climbed 0.2% from May to June.

Core PCE, which excludes the more volatile food and energy prices, was also up 0.2% in June, but slowed on an annualized basis to 4.1% from 4.6%. Analysts were forecasting core PCE to come in at the slightly higher level of 4.2%.

Core PCE is now at its lowest point since September 2021.

“It is a positive and meaningful step because it shows inflation is moving in the right direction,” said Seamus Smyth, chief economist at Virtus Investment Partners.

Smyth acknowledged the market’s enthusiastic response to the PCE data but said the