U.S. inflation moderated in June, according to the Commerce Department’s Bureau of Economic Analysis, but the improvement may be fleeting as renewed hostilities in the Middle East push energy costs higher.
The Personal Consumption Expenditures (PCE) Price Index increased 3.7% in the 12 months through June, down from an unrevised 4.1% in May. The month-over-month PCE Price Index slipped 0.1% in June, the weakest monthly reading since April 2020, following a 0.5% rise in May. This inflation data was included in the government’s advance estimate of second-quarter gross domestic product, which was also published on Thursday.
Officials attributed part of the moderation in overall PCE inflation to a retreat in oil prices when a fragile U.S.-Iran ceasefire briefly held. That ceasefire has since fallen apart. Brent oil prices are hovering just above $90 a barrel, and average U.S. gasoline prices have risen back above $4 a gallon, developments that increase the odds of inflationary pressure returning.
Excluding volatile food and energy components, the core PCE Price Index rose 3.3% on a year-over-year basis in June, down from 3.4% in May. On a monthly basis, core PCE advanced 0.1% in June after a 0.3% gain in May. The Federal Reserve monitors the PCE measures as its preferred gauge of inflation relative to its 2% objective.
The U.S. central bank on Wednesday left its benchmark overnight interest rate in the 3.50% to 3.75% range. Three members of the Fed’s policy-setting committee dissented, favoring a quarter-percentage-point increase. Fed Chairman Kevin Warsh told reporters the central bank would not "waver" in its commitment to lower inflation back to target, emphasizing "there is no soft inflation target, there is no soft implicit target, not on this committee’s watch." Economists expect the Fed to raise borrowing costs as soon as September.
Household finances that have helped blunt the impact of higher prices may be losing strength. The blow from high inflation has been softened by generous tax refunds this year, but that cushion is fading, setting up consumer spending for a second-half slowdown.
Consumer spending - which accounts for more than two-thirds of economic activity - rose 0.3% in June after a 0.9% surge in May. When adjusted for inflation, consumer spending increased 0.4% in June, matching the pace recorded in May.
Personal income climbed 0.2% in June following a 0.7% rise in May. Real disposable income - income available to households after adjusting for inflation - rose 0.3% last month. The personal saving rate ticked down to 2.7% in June from 2.8% in May, the lowest saving rate since June 2022.
These readings present a mixed picture: headline and core inflation eased modestly, but energy market developments and weakening household buffers may reaccelerate price pressures. The Fed's near-term policy path and consumer spending in the second half of the year will be important to watch as markets and policymakers assess whether the recent moderation is durable.