Fed’s Preferred Inflation Gauge Rises Higher Than Forecasts

The Federal Reserve’s preferred inflation measure came in above economists’ expectations, potentially fueling concerns that tariffs are seeping into the economy.

In June, inflation in the annual personal consumption expenditure (PCE) price index rose to 2.6 percent from 2.4 percent in May, the Bureau of Economic Analysis reported. This is the highest level since February.

The consensus estimate pointed to a 2.5 percent reading for last month.

Core PCE inflation, which strips out the volatile food and energy categories, was unchanged at 2.8 percent. However, last month’s print topped the market estimate of 2.7 percent.

On a monthly basis, PCE and core PCE rose by 0.3 percent, in line with estimates.

Monetary policymakers place more emphasis on PCE over the consumer price index because it contains a broader scope and the weights of goods and services are updated more frequently.

The PCE price index was the final inflation report for June.

“Boom times are back—at least for now—as GDP is running at 3%, unemployment is low and inflation remains in check,” Chris Zaccarelli, CIO for Northlight Asset Management, said in a note emailed to The Epoch Times.

“As with so many things in the economy, the situation is very fluid and we have yet to see the full impact of tariffs flowing through to inflation.”

From Summer to Fall

Economic observers will focus on the flurry of inflation data for July, combing through the information to determine whether tariffs are fueling renewed price pressures.

Early indicators suggest inflation will hold steady in the next batch of reports.

According to the Cleveland Federal Reserve’s Inflation Nowcasting models, the July CPI is expected to show the annual inflation rate unchanged at 2.7 percent. Additionally, PCE inflation is anticipated to come in at 2.5 percent.

The latest PCE numbers follow the Federal Reserve’s decision to hold interest rates steady for the fifth consecutive meeting.

Fed Chair Jerome Powell believes tariffs are beginning to appear in the data.

“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,” Powell told reporters at the post-meeting press conference on July 30.

National Economic Council Director Kevin Hassett criticized the Federal Reserve’s decision, saying it is “obsessed with the idea that tariffs are going to cause inflation.”

“They have been saying that really since January, and it keeps not happening,” Hassett said in a July 31 interview with Fox Business.

“The idea that tariffs are going to cause an explosion in inflation is something that people are going to have to give up.”

However, Powell’s remarks might have spooked the futures market as investors trimmed their expectations for a September interest rate cut.

According to the CME FedWatch Tool, there is a 61 percent chance of the central bank leaving the benchmark federal funds rate unchanged in a range of 4.25 percent to 4.5 percent. Prior to the meeting, traders had bet on 58 percent odds of a quarter-point rate cut.

Natalia Lojevsky, managing director at CIFC Asset Management, says the Fed will restart its rate-cutting cycle in the fall.

“We believe that the central bank likely retains its easing bias in the fall but inflation readings for July and August will ultimately determine the timing of the first cut,” Lojevsky said in a note emailed to The Epoch Times.

Following the double dissent at the July Federal Open Market Committee meeting—the first since 1993—September could potentially be a “contentious meeting,” Lojevsky added.

Dollars and Cents in June

Income and spending levels rebounded last month.

Personal income rose at a higher-than-expected pace of 0.3 percent following a 0.4 percent decline in May.

The increase in personal income was fueled by higher compensation for employees and government transfer payments.

Personal spending also climbed 0.3 percent, up from the 0.2 percent gain in the previous month. This came in slightly below the consensus forecast of 0.4 percent.

After adjusting for inflation, real personal income, excluding transfer receipts, fell 0.2 percent, while real spending remained flat.

Recent data suggest that consumers have reopened their wallets and have either shrugged off tariff fears or shopped ahead of higher prices.

June retail sales surged by 0.6 percent, the largest gain since March and an increase from the 0.9 percent decline registered in May.

Scores of surveys point to rebounding confidence and sentiment among consumers.

The Conference Board’s July Consumer Confidence Index rose slightly on improved assessments of current business conditions and the health of the labor market.

“Consumer confidence has stabilized since May, rebounding from April’s plunge, but remains below last year’s heady levels,” said Stephanie Guichard, senior economist of global indicators. “In July, pessimism about the future receded somewhat, leading to a slight improvement in overall confidence.”