Consumer prices experienced another increase in June, as favored by the Federal Reserve's preferred index.
In a recent development, the Federal Reserve has kept its benchmark federal funds rate unchanged for the fifth consecutive meeting, as tariff-induced inflation temporarily pushes the Personal Consumption Expenditures (PCE) price index above the Fed's 2% target.
The June PCE report revealed a slowing consumer, with tariffs beginning to cause a rise in prices. The headline PCE rose from 2.3% to 2.6%, while the core PCE, which excludes food and energy, increased from 2.7% to 2.8%. This sustained price increase across goods and services indicates a continued inflationary pressure.
Core goods prices have seen a sharp increase in recent months, according to Michael Pearce, deputy chief U.S. economist at Oxford Economics. Prices for goods were up 0.6% in June from a year ago, with durable goods rising 0.9% and nondurable goods up 0.5%. Services prices were 3.5% higher in June compared to the same period last year.
Despite these inflationary pressures, Federal Reserve Chair Jerome Powell is monitoring for signs of rising inflation due to the impact of tariffs. He recently stated that higher tariffs have begun to show through more clearly to prices of some goods. However, Powell and the Federal Open Market Committee (FOMC) believe that this tariff-driven inflationary effect is temporary and is likely to dissipate as tariffs’ impact fades and productivity grows with technological advances like AI.
The FOMC has, therefore, chosen to maintain a cautious stance, keeping the federal funds rate at a range of 4.25% to 4.5%. The Fed continues to prioritize returning inflation to its 2% objective while supporting maximum employment, monitoring tariff-related distortions and other inflation drivers carefully.
The latest PCE report has led to a shift in the market's expectations. The chance of the Fed leaving rates unchanged rose from 52.4% to 61% in the period after the June PCE report. This indicates a reduced likelihood of a Fed rate cut in September, as the PCE report suggests that inflation pressures may be easing.
However, it is important to note that the Federal Reserve's independence is under scrutiny, with J.P. Morgan warning that President Trump's pressure campaign could pose a risk to the Fed's independence.
In summary, tariff-induced inflation has contributed to keeping the PCE inflation rate above the Fed’s 2% target, but it is considered a temporary factor that has influenced the Fed’s decision to maintain current interest rate policy for now while staying ready to adjust if risks or inflation pressures persist.
- The increase in consumer prices, caused by tariffs, has led to a rise in the PCE price index, which has temporarily surpassed the Federal Reserve's 2% target.
- The sustained increase in prices across goods and services indicates a continued inflationary pressure, as revealed by the June PCE report.
- The Federal Reserve Chair, Jerome Powell, is monitoring the impact of tariffs on inflation, and believes that the tariff-driven inflationary effect is temporary.
- The markets have adjusted their expectations following the PCE report, with a reduced likelihood of a Fed rate cut in September, as inflation pressures may be easing.
