Fed's favored inflation gauge shows consumer prices rose again in June

The Federal Reserve's preferred inflation gauge showed that prices increased slightly in June as the central bank continues to monitor for signs of tariff-induced inflation impacting consumers.

The Commerce Department on Thursday reported that the personal consumption expenditures (PCE) index rose 0.3% on a monthly basis and 2.6% from a year ago, with the headline figure above the estimate of economists polled by LSEG. Those figures mark accelerations from last month's readings of 0.1% and 2.3%.

Core PCE, which excludes volatile food and energy prices, was up 0.3% on a monthly basis in June and 2.8% from a year ago, with the annual figure coming in above estimates. On an annual basis, core PCE ticked higher from 2.7% last month, while the monthly figure was also up from the 0.2% reading in May.

Federal Reserve policymakers are focusing on the PCE headline figure as they try to bring inflation back to their long-run target of 2%, though they view core data as a better indicator of inflation. Headline PCE rose from 2.3% to 2.6% in June, while core PCE also rose from 2.7% to 2.8%.

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Prices for goods were up 0.6% in June from a year ago. Durable goods rose 0.9% from last year and nondurable goods were up 0.5% over that period.

Services prices were 3.5% higher in June when compared with last year.

Wages and salaries increased 0.1% on a monthly basis in June, which was the slowest monthly growth since at least November.

The personal savings rate as a percentage of disposable personal income was 4.5%, unchanged from last month.

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The Commerce Department's PCE report comes a day after the central bank held interest rates steady as policymakers are on the lookout for signs of a rebound in inflation driven by President Donald Trump's tariffs.

The Federal Reserve left its benchmark federal funds rate unchanged for the fifth straight meeting, holding steady at a range of 4.25% to 4.5%.

Fed Chair Jerome Powell said that policymakers are in a good position to wait and see how tariffs impact the economy and to respond quickly if the economy shows signs of a weakening labor market or inflation starts to rise markedly. 

Powell noted that "higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen," explaining that tariffs could be a one-time shift in the price level or could lead to more persistent inflation.

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Michael Pearce, deputy chief U.S. economist at Oxford Economics, said that the latest PCE report shows a slowing consumer with tariffs beginning to cause a rise in prices.

"Tariffs are begininning to make their mark on the inflation data. While services inflation remains subdued, helped by slowing housing inflation, core goods prices are up sharply in recent months," Pearce explained. "As Federal Reserve Chair Jerome Powell argued on Wednesday, the Fed will not cut rates until it is confident that a temporary rise in goods prices isn't bleeding through into broader inflation and inflation expectations."

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The market saw the June PCE report as decreasing the likelihood of a Fed rate cut in September. The CME FedWatch tool's probability of a rate cut dropped from 46.7% after the Fed's pause yesterday to 39% on Thursday, while the chance of the Fed leaving rates unchanged rose from 52.4% to 61% in that period.