At Thursday night’s presidential debate, one topic that came up again and again was inflation.
“Inflation’s killing our country. It is absolutely killing us,” former President Donald Trump said at one point.
In reality, inflation has been declining for months, albeit slowly. And the morning after the debate, more evidence of this emerged: a downtick in the personal consumption expenditures index. In May, the year-on-year change in the PCE was 2.6%, down from 2.7% in April.
Perhaps even more important, “core PCE” — which strips out volatile food and energy prices — also declined, from 2.8% to 2.6%.
That’s significant because core PCE is the Federal Reserve’s preferred measure of inflation, and the Fed has insisted that it needs more evidence of cooling prices before it begins cutting interest rates.
“We will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%,” Chair Jerome Powell said after the Fed’s meeting earlier this month.
That “2%” is the target the Fed has in mind for core PCE, which has been moving steadily toward it this year. In January, core PCE was at 2.9%. It then sank to 2.8% in February and hovered there through March and April. In May it finally moved down again — a reassuring sign for many analysts that inflation is still moving in the right direction.
READ MORE: Ask an advisor: If inflation keeps falling, how should I invest?
The U.S. stock market certainly appeared to take the news that way. On Friday morning, the Nasdaq and S&P 500 both responded by soaring to record highs.
But in the longer term, what does this mean for the economy? The new PCE data may clear the way for the Fed to lower rates — but when? Meanwhile, consumer spending rose more slowly than expected. That puts less upward pressure on inflation, but could it also be a worrying sign for the broader economy? And for investors and their financial advisors, which assets are likely to benefit from this disinflation, and which ones will take a hit?
For answers, Financial Planning turned to some of the sharpest analysts on Wall Street. Here’s what they said: