The Fed’s preferred inflation gauge cooled in June. It might not last
By Alicia Wallace, CNN
(CNN) — The temporary truce in the war with Iran sent gas prices – and thus inflation – lower in June, providing some fuel for a crucial economic engine: the American consumer.
Overall inflation fell in June for the first time in six years. The Personal Consumption Expenditures price index – the gauge used by the Federal Reserve for its target inflation rate – dropped 0.1% from May, bringing the annual rate to 3.7% from 4.1%, Commerce Department data showed.
That reprieve helped to buoy household finances. Inflation-adjusted consumer spending rose 0.4% last month, matching an 11-month high, according to new data released Thursday by the Commerce Department.
The seemingly welcome readings, however, are likely temporary.
The inflation slowdown was largely driven by energy prices, particularly those at the fuel pump, which tumbled amid a false dawn in the Middle East war: In mid-June, the US and Iran reached a Memorandum of Understanding and ceasefire that later fell apart.
Gasoline and energy goods prices sank 9.2% in June, the largest monthly drop since August 2022. But prices have since shot higher, and the national average is back above $4 a gallon – a critical threshold for consumer psychology and sentiment.
“Setting aside the volatility caused by oil and energy prices, underlying inflation is moving right around 3%, so that’s not going to provide material comfort to households or investors,” Joe Brusuelas, RSM US chief economist, told CNN. “The improvement in June will be partially or completely reversed by the upward volatility in July.”
Energy prices are often choppy, as are food prices, so economists and policymakers closely watch “core” inflation measurements that exclude more volatile components.
When stripping out energy and food prices, the “core” PCE index rose 0.1% on a monthly basis and was up 3.3% from a year ago. It’s been at or above 3.3% for four months running, the longest such stretch in that range since the fall of 2023.
The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which includes comprehensive data on how Americans earn, spend and save.
In June, consumers increased their spending by 0.3% from the month before, with health care, motor vehicles, financial services and insurance driving the gain. When adjusting for inflation, spending was up 0.4%.
This story is developing and will be updated.
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