PCE data reinforces Fed inflation concerns
The Federal Reserve’s preferred inflation measure accelerated to its strongest annual pace since 2023, adding weight to the central bank’s recent warnings that price pressures remain too high.
The personal consumption expenditures price index, excluding food and energy, rose 0.3% for the month and reached a 3.4% annual rate. Both figures matched the Dow Jones consensus forecast.
The yearly core reading was the highest since October 2023, keeping pressure on policymakers as they assess whether additional rate increases will be needed.
Headline inflation rises to 4.1%
The broader PCE index showed inflation running at a seasonally adjusted annual rate of 4.1%, according to the Commerce Department report released Thursday.
That marked the highest headline reading since April 2023. On a monthly basis, headline PCE rose 0.4%.
The annual figure was in line with the Dow Jones estimate, while the monthly increase came in 0.1 percentage point below expectations.
Energy remains the main source of pressure
Energy continued to drive much of the inflation increase. Prices for energy related goods and services climbed 4% during the month.
Housing costs rose 0.3%, while financial services and insurance prices jumped 1.2%.
Fed officials monitor both headline and core inflation, but they generally place greater weight on the core measure because it is viewed as a clearer guide to longer term trends.
Iran war and tariffs complicate the outlook
This year’s inflation surge has been heavily influenced by higher energy prices tied to the Iran war. Those increases have gradually moved into other areas of the economy.
Officials also face the added challenge of tariffs, which are contributing to concerns that price increases may be spreading beyond energy.
Although central bankers often look past supply driven price shocks, the latest data suggests inflation is not easing quickly enough to give the Fed much comfort.
Markets still expect a September hike
Stock market futures remained positive after the report, while Treasury yields moved lower.
Traders continued to expect the Federal Reserve to raise rates in September, although the odds were trimmed slightly after the inflation data.
The market reaction suggested investors saw the figures as firm enough to support the Fed’s hawkish stance, but not severe enough to trigger a sharper repricing.
Middle class consumers feel the squeeze
Heather Long, chief economist at Navy Federal Credit Union, said inflation has reached a three year high because of the war in Iran and is creating real pressure for middle class and moderate income Americans.
She said consumers are spending more on gasoline, healthcare and utilities, while new Fed Chair Kevin Warsh has made clear that bringing inflation down is a priority.
Long added that the key question is how much relief arrives before September.
Spending and income remain stronger than expected
Despite elevated inflation, consumers continued to spend at a solid pace during the month.
Personal consumption expenditures rose 0.7%, exceeding the forecast by 0.1 percentage point and outpacing the monthly inflation rate.
Personal income also increased 0.7%, well above the expected 0.4% gain. The personal saving rate climbed to 3%.
Fed statement turns more forceful
The inflation report arrived a little more than a week after the Federal Reserve and Warsh delivered a firmer message on prices and interest rates.
Warsh emphasized the need to restore price stability. The Federal Open Market Committee also adopted language saying it would “deliver price stability” after missing its 2% inflation target for five consecutive years.
Officials removed a previously signaled rate cut for this year and instead indicated that a rate increase is likely.
Forward guidance dispute fades from statement
At the April meeting, several Fed officials dissented because the statement included forward guidance that leaned toward further rate cuts.
That language was removed from last week’s statement, reflecting a more cautious approach as inflation remains above target.
The change gives policymakers more flexibility as they respond to incoming inflation, employment and growth data.
GDP revision shows firmer growth
Other economic figures released Thursday showed that the economy remains on relatively solid ground.
Gross domestic product rose at a seasonally adjusted annualized rate of 2.1% in the first quarter, according to the final reading.
That was stronger than the prior estimate of 1.6% and better than the forecast of 1.7%. The Commerce Department said the revision mainly reflected a lower estimate for imports, which subtract from GDP.
Jobless claims fall more than expected
Initial jobless claims also pointed to continued labor market strength.
Claims fell to 215,000 for the week ended June 20, down 12,000 from the previous reading.
The figure was also better than the estimate of 223,000, giving the Fed another sign that the economy may be strong enough to withstand tighter monetary policy.
