U.S. June PCE Inflation Falls for First Time in Four Years, Leaving Fed’s Next Move Unclear
A key inflation gauge tracked by Federal Reserve policymakers fell in June, a day after the central bank’s latest interest-rate decision, but remained well above the Fed’s 2% target. With the economy’s underlying drivers broadly resilient, markets are increasingly speculating about how the Fed will respond under new Chair Kevin Warsh, leaving the path of monetary policy uncertain. Data released Thursday by the U.S. Commerce Department showed that the personal consumption expenditures price index fell 0.1% from the previous month as lower energy prices weighed on overall inflation. The year-over-year PCE inflation rate declined to 3.7% from 4.1% in May, when it had reached a three-year high. Core PCE inflation, which excludes volatile food and energy prices, rose 0.1% month over month in June and 3.3% from a year earlier. The monthly increase was below the market’s 0.2% expectation, while the annual increase matched the 3.3% forecast. Core inflation had risen 3.4% year over year in May. By category, energy goods and services prices plunged 5.9% in June as a temporary easing of the conflict in the Middle East helped drive prices lower. Gasoline prices fell 9.2%. Housing inflation also cooled, rising just 0.2%. Overall goods prices declined 0.6%, while services prices edged up 0.1%. The Federal Reserve regards the PCE index, particularly core PCE, as its most reliable measure of the trend in U.S. inflation. The data showed that inflation has remained significantly above the central bank’s 2% policy target for a sixth consecutive year. Consumer spending remained resilient in June, rising 0.3% from the previous month, in line with expectations. Personal income increased 0.2%, however, below the 0.3% market forecast. As a result, households had to draw on savings to sustain spending, pushing the personal saving rate down to 2.7%, its lowest level in four years. Policy outlook remains uncertain With labor-market indicators stabilizing this year, inflation has become policymakers’ primary concern. There is still substantial uncertainty over whether inflation can continue to cool. The main driver of June’s decline was lower oil prices after Iran and the United States reached a fragile cease-fire and began talks. Their differences remain wide, however, and crude prices are still relatively high. A compilation by a Yicai reporter found that Wall Street generally expects inflation to remain above 3% through the end of the year, increasing pressure on the Fed to tighten policy. The Federal Reserve said Wednesday that it would leave interest rates unchanged. At a news conference, Chair Warsh said that although the Fed remains determined to contain inflation, market interest rates had risen in recent weeks, giving the central bank some policy breathing room. But three of the 12 members of the policy committee dissented in favor of a rate increase. Long-term Treasury yields also climbed sharply Wednesday, suggesting that pressure on the Fed to raise rates is intensifying. Warsh’s reluctance to elaborate on his views disappointed markets. Questions have emerged over whether he will take substantive policy action to deliver on his tough rhetoric against inflation. Stocks plunged that day, while bonds also came under selling pressure. Robert Tipp, PGIM’s head of global bonds and chief investment strategist, said, “The market verdict has generally been poor.” It is too early to conclude that Warsh’s credibility or the Fed’s has been damaged, but the sharp reactions across Wall Street asset classes are an ominous sign. Some of the disappointment may simply reflect the market’s need to adjust to Warsh’s markedly different communication style compared with those of his three predecessors, Ben Bernanke, Janet Yellen and Jerome Powell. Warsh does not embrace so-called forward guidance, in which the central bank signals the direction and reasoning of future interest-rate policy. After 15 years of highly transparent communication, the Fed now faces a noticeable information vacuum. JPMorgan also revised its expectations this week, forecasting a 25-basis-point rate hike in December, a significant acceleration from its previous forecast of a hike in the second half of 2027. JPMorgan expects the December increase to lift the federal funds target range to 3.75%-4.00%, where it would remain. The bank also cautioned that a September hike remains possible if inflation continues to accelerate. The CME FedWatch tool showed that markets were pricing in a 65.2% probability of a September hike, down from 81% before the policy statement was released. Major investment banks are sharply divided. Goldman Sachs and Barclays continue to expect the Fed to leave rates unchanged for the rest of the year. BofA Global Research expects three rate hikes beginning in September. In contrast, Citi, which has long maintained a dovish stance, reaffirmed after the July policy meeting its view that the Fed will cut rates in October and December this year, followed by another cut in January 2027.
Data released Thursday by the U.S. Commerce Department showed that the personal consumption expenditures price index fell 0.1% from the previous month as lower energy prices weighed on overall inflation. The year-over-year PCE inflation rate declined to 3.7% from 4.1% in May, when it had reached a three-year high.
Core PCE inflation, which excludes volatile food and energy prices, rose 0.1% month over month in June and 3.3% from a year earlier. The monthly increase was below the market’s 0.2% expectation, while the annual increase matched the 3.3% forecast. Core inflation had risen 3.4% year over year in May.
By category, energy goods and services prices plunged 5.9% in June as a temporary easing of the conflict in the Middle East helped drive prices lower. Gasoline prices fell 9.2%. Housing inflation also cooled, rising just 0.2%. Overall goods prices declined 0.6%, while services prices edged up 0.1%.
The Federal Reserve regards the PCE index, particularly core PCE, as its most reliable measure of the trend in U.S. inflation. The data showed that inflation has remained significantly above the central bank’s 2% policy target for a sixth consecutive year.
Consumer spending remained resilient in June, rising 0.3% from the previous month, in line with expectations. Personal income increased 0.2%, however, below the 0.3% market forecast. As a result, households had to draw on savings to sustain spending, pushing the personal saving rate down to 2.7%, its lowest level in four years.
Policy outlook remains uncertain
With labor-market indicators stabilizing this year, inflation has become policymakers’ primary concern.
There is still substantial uncertainty over whether inflation can continue to cool. The main driver of June’s decline was lower oil prices after Iran and the United States reached a fragile cease-fire and began talks. Their differences remain wide, however, and crude prices are still relatively high. A compilation by a Yicai reporter found that Wall Street generally expects inflation to remain above 3% through the end of the year, increasing pressure on the Fed to tighten policy.
The Federal Reserve said Wednesday that it would leave interest rates unchanged. At a news conference, Chair Warsh said that although the Fed remains determined to contain inflation, market interest rates had risen in recent weeks, giving the central bank some policy breathing room. But three of the 12 members of the policy committee dissented in favor of a rate increase. Long-term Treasury yields also climbed sharply Wednesday, suggesting that pressure on the Fed to raise rates is intensifying.
Warsh’s reluctance to elaborate on his views disappointed markets. Questions have emerged over whether he will take substantive policy action to deliver on his tough rhetoric against inflation. Stocks plunged that day, while bonds also came under selling pressure. Robert Tipp, PGIM’s head of global bonds and chief investment strategist, said, “The market verdict has generally been poor.”
It is too early to conclude that Warsh’s credibility or the Fed’s has been damaged, but the sharp reactions across Wall Street asset classes are an ominous sign. Some of the disappointment may simply reflect the market’s need to adjust to Warsh’s markedly different communication style compared with those of his three predecessors, Ben Bernanke, Janet Yellen and Jerome Powell. Warsh does not embrace so-called forward guidance, in which the central bank signals the direction and reasoning of future interest-rate policy. After 15 years of highly transparent communication, the Fed now faces a noticeable information vacuum.
JPMorgan also revised its expectations this week, forecasting a 25-basis-point rate hike in December, a significant acceleration from its previous forecast of a hike in the second half of 2027. JPMorgan expects the December increase to lift the federal funds target range to 3.75%-4.00%, where it would remain. The bank also cautioned that a September hike remains possible if inflation continues to accelerate. The CME FedWatch tool showed that markets were pricing in a 65.2% probability of a September hike, down from 81% before the policy statement was released.
Major investment banks are sharply divided. Goldman Sachs and Barclays continue to expect the Fed to leave rates unchanged for the rest of the year. BofA Global Research expects three rate hikes beginning in September. In contrast, Citi, which has long maintained a dovish stance, reaffirmed after the July policy meeting its view that the Fed will cut rates in October and December this year, followed by another cut in January 2027.