The Federal Reserve’s main price index rose to its highest level since 2023, confirming the central bank’s recent tough stance on inflation.
The personal consumption expenditure price index, which excludes food and energy, rose 3.4% for the year after rising 0.3% in the month, both in line with the Dow Jones consensus. The annual core value was the highest since October 2023.
The Commerce Department’s report on Thursday showed that inflation for all components of the PCE index was running at a seasonally adjusted annual rate of 4.1%, the highest level since April 2023. On a monthly basis, PCE accelerated by 0.4%. The annual level was in line with the Dow Jones consensus estimate, but the monthly reading was less than 0.1 percentage point.
Fed officials keep an eye on both the headline rate and the core rate, but generally believe the latter is a better measure of long-term trends, especially given that higher energy prices related to the Iran war, largely due to this year’s spike in inflation, have slowly trickled down to other parts of the economy.
After the announcement, stock market futures remained in positive territory, but U.S. Treasury yields fell. Traders continued to expect the Fed to approve a rate hike in September, but the odds were lowered slightly.
Energy was once again the biggest source of price increases, with prices of related goods and services rising 4% over the month. Housing costs rose 0.3%, while financial services and insurance rose 1.2%.
“Inflation is at a three-year high due to the Iran war, which is painful for middle-class and middle-income Americans,” said Heather Long, chief economist at Navy Federal Credit Union. “People are spending more on gasoline, in addition to health care and utilities. New Fed Chairman Kevin Warsh has made clear his determination to rein in inflation. The key will be how much easing happens by September.”
Despite rising inflation levels, consumer spending was stronger than expected in the month.
Personal consumption expenditure, a measure of spending, rose 0.7% in the month, beating expectations by 0.1 percentage point and outpacing the inflation rate. Personal income also increased by 0.7%, much higher than the expected 0.4%. The personal savings rate rose to 3%.
Shoppers view fresh vegetable displays at Market 32 Supermarket on June 4, 2026 in South Burlington, Vermont.
Robert Nickelsburg Getty Images
The report comes a little more than a week after the Fed and Warsh released what the market broadly sees on interest rates and inflation.
Mr. Warsh particularly emphasized the importance of price stability, and the Federal Open Market Committee adopted language in its post-meeting statement that explicitly stated it would “achieve price stability” after failing to meet its 2% inflation target for five consecutive years. Officials also reversed previously suggested interest rate cuts this year and signaled the possibility of rate hikes.
However, the inflation situation is complex. Fed officials have generally focused on supply-driven price increases caused by the energy surge, but there are growing concerns that price increases are more widespread and driven by tariffs.
The statement included “forward-looking guidance” for further rate cuts in the future, and several Fed officials objected to it at their April meeting after that language was removed from last week’s statement.
Other indicators released Thursday show the economy is in relatively strong shape.
Gross domestic product (GDP), the broadest measure of growth, grew at a seasonally adjusted annual rate of 2.1% in the first quarter, the last of three readings showed. This was up from the prior estimate of 1.6% and exceeded the forecast of 1.7%. The Commerce Department said the change primarily reflects a downward revision of imports deducted from gross domestic product (GDP).
Additionally, the number of new unemployment insurance claims for the week ending June 20 was 215,000, 12,000 fewer than previously announced and higher than the expected 223,000.
