The Federal Reserve’s preferred inflation measure — the Personal Consumption Expenditures, or PCE — ticked higher last month, signaling that President Trump’s tariffs are pushing some prices higher.
Prices rose 2.6% in June compared with a year ago, the Commerce Department said Thursday, up from an annual pace of 2.4% in May. Excluding the volatile food and energy categories, prices rose 2.8% in the past year, the same as the previous month, which was revised higher.
The figures help illustrate the central bank’s reason for its decision Wednesday to keep its key interest rate steady, with Federal Reserve Chairman Jerome Powell stressing that inflation still remains above the Fed’s goal of a 2% annual rate. Powell suggested it could take months for the central bank to determine whether the president’s new import duties would cause just a one-time rise in prices, or a more persistent increase in inflation.
“The Fed got validation this morning with inflation coming in a little higher than expected,” noted Scott Helfstein, head of investment strategy at Global X in an emailed comment. “There is some evidence of tariff impact in the inflation data, but it remains modest. Health care, housing and utilities continue to be key sources in driving inflation.”
On a monthly basis, prices ticked up 0.3% from May to June, while core prices also rose 0.3%. Both figures are higher than what would be consistent with the 2% target.
On Wednesday, the Fed kept its benchmark interest rate unchanged, citing elevated uncertainty over the nation’s economic outlook and inflation that remains higher than its 2% annualized goal. The central bank last cut rates in December 2024, prior to Mr. Trump’s January inauguration.
Mr. Trump has been pressuring Powell to cut rates, arguing that lower rates are justified because inflation remains tame and that other nations have been cutting their benchmark rates this year. Nevertheless, the majority of the Fed’s 12-person Federal Open Market Committee, or FOMC, the 12-person central bank’s rate-setting panel, voted on Wednesday to maintain rates in the range of 4.25% to 4.5%, although there were two dissenting votes in favor of a cut.
The rise in the PCE’s inflation data may lessen the likelihood of a rate cut at the Fed’s September meeting, said Harry Chambers, assistant economist at Capital Economics, a forecasting firm.
“The above-target rise in core 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,” Chambers said.
Higher grocery and gas prices
The government’s measure of gas prices jumped 0.9% from May to June, while grocery costs rose 0.3%. Many longer-lasting goods that are heavily imported saw clear price increases, with furniture prices up 1.3% just last month, appliances up 1.9%, and computers up 1.4%.
The cost of some services fell dramatically last month, offsetting some of the price pressures from goods. Air fares dropped 0.7% from May to June, while the cost of hotel rooms plunged 3.6% just in one month.
Thursday’s report also showed that consumer spending rose 0.3% from May to June, a modest rise that suggests Americans are still spending cautiously. Adjusted for inflation, the increase was just 0.1%, the government said.
Americans’ incomes also saw a modest increase, rising 0.3% last month, a rebound after a 0.4% drop in May. Adjusted for inflation and taxes, however, incomes were flat in June.
Consumers have been cautious all year. On Wednesday, the government said the economy expanded at a 3% annual rate in the second quarter, a solid showing but one that masked some red flags.
Consumer spending, for example, rose at a lackluster 1.4% pace, after an even smaller gain of 0.5% in the first three months of the year. A sharp drop in imports in the April-June quarter, which followed a surge in the first quarter, provided a big lift to the government’s calculation of U.S. gross domestic product.
Earlier this month, the government reported that its more closely watched Consumer Price Index, its primary inflation measure, also ticked higher in June as the cost of heavily imported items such as appliances, furniture and toys increased.
