Consumer prices experienced another upward tick in June, according to a preferred gauge by the Federal Reserve.
Fed's PCE Inflation Shows Modest Increase Due to Tariffs
The Federal Reserve's Personal Consumption Expenditures (PCE) index has shown a modest increase due to tariffs imposed by President Donald Trump, reflecting some upward pressure on inflation from these trade policies.
The PCE inflation rate ticked higher in mid-2025, rising to 2.6% year-over-year in June from 2.4% in May. This rise is partly attributed to tariffs that led to higher prices for imported goods such as appliances and automobiles, pushing some consumer prices upward but not causing a broad or sustained inflation surge yet.
Economic analysis from J.P. Morgan estimates that Trump's tariffs, particularly on autos and auto parts, could raise PCE inflation by about 0.2 to 0.3 percentage points in 2025. The tariffs are expected to increase costs for consumers, with potential auto price increases up to around 11.4% if manufacturers fully pass on tariff costs.
However, economists commonly highlight that these tariff-induced price increases tend to be temporary rather than causing long-term persistent inflation. The Fed acknowledges the tariff impact but sees other factors like health care and housing as more significant inflation drivers currently. Chairman Powell and others suggest it will take months to determine if tariffs create a one-time price jump or more enduring inflation effects.
In June, prices for goods were up 0.6% from a year ago, with durable goods rising 0.9% and nondurable goods up 0.5%. The personal savings rate as a percentage of disposable personal income remained unchanged at 4.5%.
The Federal Reserve left its benchmark federal funds rate unchanged for the fifth straight meeting. The market saw the June PCE report as decreasing the likelihood of a Fed rate cut in September. Core PCE, which excludes volatile food and energy prices, was up 0.3% on a monthly basis in June and 2.8% from a year ago. The personal consumption expenditures (PCE) index rose 0.3% on a monthly basis and 2.6% from a year ago.
Services inflation remains subdued, according to Michael Pearce, despite slowing housing inflation. Services prices were 3.5% higher in June compared to last year. The Federal Reserve's preferred inflation gauge showed a slight increase in June.
It is worth noting that there are concerns that the independence of the Federal Reserve could be at risk due to Trump's pressure campaign, according to J.P. Morgan. However, Chairman Powell argued that the Fed will not cut rates until it is confident that a temporary rise in goods prices isn't bleeding through into broader inflation and inflation expectations.
In summary, Trump's tariffs have caused a modest but noticeable increase in the Federal Reserve's PCE inflation measure, signaling some tariff-driven price pressures on consumer goods but not a runaway or permanent inflation spike. The overall inflation remains above the Fed's 2% target partly due to these tariffs and other underlying cost pressures.
- The rise in the PCE inflation rate, partly attributed to tariffs, has put some financial strain on consumers, as the prices for imported goods like appliances and automobiles have gone up.
- Economists have advised that the tariff-induced price increases often tend to be temporary, not causing long-term persistent inflation, but it remains uncertain whether they will create a one-time price jump or more enduring inflation effects.
- With the Fed leaving its benchmark federal funds rate unchanged, some market observers have suggested that the June PCE report may have decreased the likelihood of a Fed rate cut in September.
- The Federal Reserve's preferred inflation gauge showed a slight increase in June, and with services inflation remaining subdued, overall inflation remains above the Fed's 2% target partly due to these tariffs and other underlying cost pressures.
