The Federal Reserve’s preferred measure of inflation edged higher in June, the Commerce Department reported on Thursday. Consumer prices ticked up 0.3% for the month and 2.6% year over year, according to the government’s Personal Consumption Expenditures price index. June’s annual increase was slightly higher than the 2.4% rate as of May, suggesting that President Trump’s tariffs might be starting to push prices higher.
Core prices, which exclude more volatile food and energy costs, also rose 0.3% for the month. They were 2.8% higher than a year earlier.
J.P.Morgan economist Michael S Hanson wrote in a note to clients that the latest data suggest that inflationary pressure rose over the second quarter of the year. Hanson pointed out that the three-month annualized rate of core PCE inflation climbed to 2.6% last month, up from 2% in May, which itself was revised higher from a previous 1.7%. “All told, progress toward bringing both wage and price growth down to levels consistent with the Fed’s price stability mandate has stalled recently,” Hanson wrote, adding that the data confirm that “tariffs are starting to pass through more significantly to consumers.”
The data also presents a challenge for the Federal Reserve, which held interest rates steady yesterday despite continuing calls from President Donald Trump to lower rates. Fed policymakers must decide how to move forward in the face of conflicting economic signals. The labor market has shown signs of cooling, which would normally prompt the Fed to lower rates to stimulate economic activity, but inflation remains above the Fed’s 2% target and could head higher because of Trump’s tariffs, which would suggest that rates should stay high. Fed officials must also try to determine whether any pricing pressure from the tariffs is a one-time phenomenon or spirals into a longer-lasting problem. The Fed’s Board of Governors is already divided, with two members dissenting from yesterday’s decision to keep rates where they have been for a fifth straight meeting.
“The above-target rise in core PCE prices in June, upward revisions to previous months’ data and the sharp rise in core goods inflation will do little to ease the Fed’s concerns about tariff-driven inflation,” Harry Chambers, an economist at Capital Economics, wrote in a research note Thursday. “If these pressures persist, as we expect, a September cut looks unlikely.”
Chambers notes, though, that while inflation pressures are strong, other elements of Thursday’s report provide ammunition to Fed officials who are ready to cut rates. Consumer spending ticked up 0.1% in inflation-adjusted terms, and personal income was flat after factoring in inflation. Economists see U.S. consumers becoming more cautious and facing further risks ahead.
“I think we’re seeing modest growth in consumer spending,” Gus Faucher, chief economist of The PNC Financial Services Group, told CNN. “The economy has definitely downshifted over the past year; we’re seeing slower job growth, slower income growth and along with that is coming slower consumer spending growth.”
What’s next: Economists will be looking closely at tomorrow's jobs report, focused on both the health of the labor market and details about workers’ hours and earnings.