Some Relief on Fed’s Favorite Inflation Measure; Powell Says The Clock is Ticking on Preventing Sustained High Inflation

The Fed’s favorite inflation gauge came in this week. The PCE rose 0.2% in May but fell 0.5% when inflation was considered. Personal incomes were a similar story as well. They rose .5% but after being adjusted for inflation the number was down 0.1% while prices continued rising in May at a clip of 0.6%. This was cut in half when food and fuel prices were excluded. Encouragingly, the indicator without food and fuel included declined for the third consecutive month.  There has been a deceleration in the prices of many key goods and services, but elevated energy prices are continuing to squeeze the consumer. Energy prices can have a particularly vicious inflationary impact since they also affect transportation costs.

The inflationary pressures along with a decelerating economy appear to be squeezing net profit margins. Estimates for margins in the Consumer Discretionary sector have come down from 6.7% to 6.4%. Other assets have taken a pummeling this quarter. While stocks had their worst first half since 1970, investment grade bonds had their worst start to the year ever. The TINA justification for stocks is also diminishing. Micron ($MU) made an announcement that their EPS expectations for the approaching quarter had gone from around 10% above consensus to 37% below cons...

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