Fed Keeps Sights on Core Prices as Inflation RetreatsFedKeepsSightsonCorePricesasInflationRetreats

US consumer inflation has dipped to its lowest level in more than two years, continuing a retreat from the 40-year highs observed last summer. But stickier prices for a key group of goods and services are expected to keep the Federal Reserve on track for a rate hike at the end of July. The consumer price index registered a 3% increase year-over-year in June, down from 4% in May and slightly lower than economists had anticipated. While this offered a positive sign for the trajectory of overall inflation, the decline has shifted attention to the persistence of underlying price pressures. Core CPI, which strips out food and energy costs and is seen as a more reliable gauge of future price trends, was up 4.8% year-over-year. In remarks delivered this week, Fed officials indicated that rates need to rise further to pull inflation back to the central bank’s 2% target.

Considered alongside inflation’s retreat, upbeat economic signals such as a resurgent services sector and robust labor demand illustrate macro resilience against higher rates. The US economy’s performance has raised hopes that it could stave off a recession altogether, but risks remain beyond the immediate horizon. PGIM Quantitative Solutions’ third-quarter outlook explains why a still-hawkish Fed, stricter bank lending, negative business surveys and high valuations are reasons to opt for a cautious investment strategy and favor themes like quality and safety.