U.S. June Core PCE Rises, Adding Uncertainty to Rate Cut Outlook

TradingKey - On Friday morning (U.S. Eastern Time), the U.S. Commerce Department released the June PCE Price Index, the Federal Reserve’s preferred inflation gauge — and the data came in hotter than expected.

TradingKey - The core PCE price index, which excludes volatile food and energy prices, rose 2.8% year-over-year, above the 2.7% forecast and revised up from a prior reading of 2.7%. On a monthly basis, it increased 0.3%, matching expectations and up from the previous 0.2%.The headline PCE index rose 2.6% annually and 0.3% month-on-month, both exceeding forecasts and marking the highest levels since February.

The inflation rebound was primarily driven by rising goods prices, including household items, apparel, and sporting equipment — a sign that inflationary pressures from proposed import tariffs under the Trump administration are beginning to pass through to consumers.Services inflation (excluding energy and housing) rose 0.2% month-over-month for the second consecutive month, indicating that underlying price pressures remain persistent.

At the same time, consumer spending showed signs of weakness.Personal spending in June grew modestly, with durable goods spending declining for the third consecutive month — the longest losing streak since 2021 — reflecting constrained discretionary spending.Real disposable income was flat, wage growth remained stagnant, and the personal saving rate held steady at 4.5%.

Nick Timiraos, widely regarded as the “Fed’s unofficial voice,” noted that the three-month annualized rate of core PCE reached 2.6% in June, up from 2.3% a year ago — suggesting inflation progress has stalled or even reversed.

Although the Fed has held rates steady for five consecutive meetings and Chair Powell has described the labor market as “solid,” economists warn that underlying weaknesses are accumulating: job seekers are taking longer to find work, and labor market matching is becoming more difficult.

Initial jobless claims edged up to 218,000, while continuing claims held steady at 1.95 million, indicating that while the unemployment rate remains low, momentum is waning. Markets widely expect Friday’s upcoming nonfarm payrolls report to show further softening in the labor market.

The current economic picture — stubborn inflation paired with sluggish growth — has deepened internal disagreements at the Fed over the timing of rate cuts. On one hand, tariffs threaten to push prices higher; on the other, weakening consumption and labor trends limit room for prolonged tightening.

The June PCE data strengthens expectations that any rate cuts this year may be delayed. For now, the path forward remains uncertain — and the Fed will likely need more data before making its next move.