Key Takeaways
- Inflation, as measured by Personal Consumption Expenditures, likely accelerated to its highest level since February.
- Tariffs on toys, sporting goods, furniture, and other items are being passed on to consumers, pushing prices up.
- The inflation rate remains well over the Fed’s goal of 2% a year, though it’s fallen significantly since 2022.
The Federal Reserves preferred measure of inflation likely heated up in June, as tariffs started to push up consumer prices.
A report from the Bureau of Economic Analysis on Thursday is expected to show consumer prices as measured by the Personal Consumption Expenditures index rose 2.5% over the last 12 months as of June, according to a survey of forecasters by Dow Jones Newswires and The Wall Street Journal. That would be up from a 2.3% increase in May, making for the highest annual inflation since February.
The uptick would echo the increase in inflation as measured by the Consumer Price Index, which was reported earlier in the month. Inflation has fallen significantly since hitting a 40-year peak in 2022, but remains above the Federal Reserves goal of a 2% annual rate. The Fed uses Core PCE inflation as its benchmark, and that figure is expected to come in at an annual increase of 2.7% for June, the same as in May.
Economists said some merchants may have been able to avoid raising prices for customers, at least temporarily, because they stockpiled inventory before the tariffs went into effect. The June inflation report could show some early signs of those costs now being passed on to consumers.
The latest data showed clearer evidence that tariffs are leading to higher prices for core goods components, including recreational goods, household furnishings, and toys, among other categories, economists at Deutsche Bank, led by senior U.S. economist Brett Ryan, wrote in a commentary.
What This Report Could Mean For the Federal Reserve
Stubborn inflation could prompt the Fed to keep interest rates higher for longer than financial markets anticipate.
Fed officials have kept the central banks interest rate higher than usual, putting upward pressure on interest rates for all kinds of loans. The high rates are designed to discourage borrowing and spending and quash the post-pandemic surge of inflation.
The possibility that President Donald Trumps tariffs could set off a fresh wave of inflation has kept Fed officials from cutting rates this year, a decision that Trump has frequently criticized.
Traders are betting the Fed will hold its key fed funds rate steady when the Federal Open Market Committee meets Wednesday, according to the CME Groups FedWatch tool. The tool forecasts rate movements based on fed funds futures trading data. Inflation running hotter or cooler than expectations could affect the rate outlook.
Investors are pricing in a 65% chance of a rate cut in September, according to CME.
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