The Fed's Preferred Inflation Metric Slowed in June -- but Investors Shouldn't Get Too Excited Yet

The Personal Consumption Expenditures (PCE) Price Index is the gold standard for measuring inflation, according to the U.S. Federal Reserve. “That’s our number; we’re sticking with it,” said Fed Chair Kevin Warsh at yesterday’s press conference.

Then today, the June 2026 PCE Price Index was released, showing a decrease in PCE prices for the first time in six years. You'd think that'd be cause for celebration.

Not so fast. That decrease, unfortunately, comes with a huge asterisk. Here’s why we shouldn’t get excited about June’s PCE, but instead should get worried about what it means for inflation in the coming months.

Image source: Getty Images.

Why it’s down

Over the last decade, monthly declines in PCE have been extremely rare. The last time we saw one was at the start of the COVID-19 pandemic. PCE fell 0.3% in March 2020 and 0.4% in April 2020.

There have only been three other monthly PCE declines since 2016. All three were tiny 0.1% drops: in January 2019, March 2017, and February 2016. During the previous ten years, however, monthly PCE drops were more common. 2008, 2012, and 2015 each had three monthly PCE drops, and 2013 and 2014 each had two.

However, the cause of almost all of these small monthly declines was the same: a large drop in gasoline prices.

Image source: Getty Images.

The largest monthly decline in PCE in the last 20 years was in November 2008. That 1.2% drop was fueled (no pun intended) by a 28.7% drop in the prices of “gasoline and other energy goods” (nearly all of which are other hydrocarbon fuels). The biggest drop of the 2010s, a 0.5% drop in January 2015, was caused by a 15.2% decline in gasoline prices.

On June 17 of this year, President Trump signed a memorandum of understanding (MOU) to end the Iran war, which briefly reopened the Strait of Hormuz, sending oil prices – and subsequently, fuel prices – lower. The 9.2% decrease in gasoline prices more than offset increases in the prices of recreational goods, food, and beverages to lower the PCE by 0.1%

But here’s why that’s not such good news.

It’s only temporary

The 9.2% drop in fuel prices resulted in just a 0.1% drop in PCE in June, but it didn’t even come close to offsetting the gasoline price increases from prior months.

Gasoline was up 20.9% in March, 5.5% in April, and 6.5% in May. That translated to PCE increases of 0.7%, 0.4%, and 0.5% in those three months. Even if you factor in June’s 0.1% drop, PCE inflation is higher this year than it was at this time last year.

And those gas prices have already risen again with the collapse of the ceasefire, the re-closing of the Strait of Hormuz, and the resumption of the U.S. bombing campaign against Iran.

Benchmark Brent Crude oil spent the second half of June trading below $80/barrel. In July, it shot back up again to more than $100/barrel, and is currently trading at about $89/barrel.

That means July’s PCE will likely follow the same pattern as March, April, and May: a big jump in gasoline prices overwhelms all other categories to push the PCE higher again.

What it means for investors

Excluding food and energy, June’s PCE posted a very modest 0.1% gain, the lowest so far this year. But for most consumers, food and energy – which here includes electric and gas utility services – make up a big chunk of their nondiscretionary spending.

In other words, Thursday’s PCE report doesn’t make a September interest rate hike any less likely, nor does it signal an end to the high inflation we’ve been seeing. It’s just a temporary blip that’s probably already over.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.