Inflation picked up in June, driven largely by tariffs, according to the personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge.
Goods prices increased by 0.4% from the prior month, the fastest pace since January, while services prices held steady at 0.2% for the fourth consecutive month, according to government data released Thursday.
Important tariff-sensitive categories saw sharp price rebounds in June, with the exception of automobiles.
Auto prices declined on the month, but given that the sector has faced higher tariffs since March, the pullback likely reflects weaker demand rather than a reversal of cost pressures. That dynamic suggests further upward pressure on inflation in the months ahead.
Consumers under pressure
Spending growth continued to slow as households grappled with rising prices and uncertainty. Real spending—adjusted for inflation—rose by only 0.1% in June, while nominal spending increased by 0.3%.
The divergence was particularly pronounced in durable goods. Nominal spending on durables was flat, but after adjusting for inflation, it fell by 0.5%. That drop underscores how price pressures have dampened discretionary purchases, with consumers redirecting spending toward essentials.
Meanwhile, wage and compensation income posted the softest monthly gain in nearly a year, rising by only 0.1%, the weakest since July of last year.
While the labor market remains stable, rising input costs and compressed margins could weigh on future hiring and earnings growth, especially if firms choose not to fully pass through higher tariffs to consumers.
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Policy outlook turns cautious
The report complicates the Federal Reserve’s outlook. Officials had signaled that rate cuts were likely this year, but recent data—including this week’s inflation and spending figures—has reduced the urgency for such a move.
With inflation trending higher and demand cooling, the Fed is likely to proceed with greater caution. More volatility in labor and price data could push policymakers to maintain rates for longer as they evaluate whether the current trend marks a temporary shock—or something more persistent.