The Federal Reserve’s preferred gauge for inflation, the core personal consumption expenditures index, increased by 2.6% from a year earlier, according to data released Friday morning, marking its slowest increase in six months and creating hope that a rate cut may come sooner than expected.

Core PCE, which tracks household spending while excluding more volatile items like energy and food, came in below the 2.8% year-over-year readings each of the prior three months.

Inflation increased by slightly less than 0.1% from April, the smallest uptick since 2020, Bloomberg reported.

“The economy is moving in the right direction, with persistent growth, moderating inflation, and a more normal balance in the job market,” Bill Adams, chief economist at Comerica Bank, told Bloomberg in a statement. “This is the kind of good data that will persuade the Fed that inflation is heading back to normal.”

Inflation is still higher than the Fed’s 2% goal, but the PCE is down from its 2022 peak of 7.1%, The New York Times reported.

Treasury yields dropped after the Fed released the PCE numbers, CNBC reported, while one index of real estate investment trusts jumped by almost 2% in early trading as investors speculated about rate cuts.

“The deflation in goods prices and weakness we are starting to see at least gets us a path to a possible September cut,” KPMG Chief Economist Diane Swonk told Bloomberg.

The PCE index reveals that while household demand remained strong, the cost of borrowing is affecting some parts of the economy, including air travel, healthcare and spending on items like computer software and vehicles.

But some members of the Fed are less optimistic than investors about a rate cut arriving sooner.

“After seeing considerable progress on slowing inflation last year, we have seen only modest further progress this year,” Michelle Bowman, a Fed governor, said in a speech Thursday. “We are still not yet at the point where it is appropriate to lower the policy rate, and I continue to see a number of upside risks to inflation.”

Wage growth is still fueling consumer spending, with real disposable income registering a 0.5% increase, the largest since January. The next report expected to signal how the Fed’s actions have worked to control inflation is the employment report, set to be released July 5.

The PCE data follows the news earlier this month that the consumer price index, the other metric that central bankers pay close attention to, fell by 0.1% in May from the month prior.

In June, the Fed announced that it would hold interest rates steady once again, but governors revised their March expectations of three rate cuts down to just one, with several members of the Federal Open Market Committee anticipating no rate cuts at all this year.

For commercial real estate, the question of when interest rate cuts will come is crucial to markets paralyzed by disagreements over the true value of assets.

“The question for real estate is how much longer can investors hold out?” Derek Tang, an economist at LH Meyer, told Bisnow earlier this month. “If this is going to be a longer-term trend, then we're going to need some permanent solutions.”