The latest PCE inflation report came in cooler than expected, giving both stocks and bonds a boost. Headline inflation rose just 0.3% for the month, while the year-over-year rate fell from 3.7% to 3.4%, better than forecasts. Core inflation, which excludes food and energy, increased only 0.2% and declined from 3.3% to 3.0% annually.

The softer inflation data could reduce pressure on the Federal Reserve to raise rates immediately. New York Fed President John Williams indicated there is no urgency to act following September’s rate hike, although he still expects another increase may be needed later this year.

One area of concern is consumer finances. The savings rate dropped from 4.6% to 4.1%, its lowest level in four years, suggesting consumers continue to spend while saving less.

The inflation report was encouraging for financial markets and showed meaningful progress toward lower inflation, which could help ease some of the upward pressure on interest rates if the trend continues.

Source: MBS Highway