Inflation ticked up in June according to a key metric, raising concerns for the Fed.

June Inflation Data Points to Tariff Impact and Complicates Fed Policy Path

Tariff Effects Begin to Show in Consumer Prices

New inflation data suggests that President Trump’s tariffs are beginning to filter into consumer prices. According to the Commerce Department’s release on Thursday, the Federal Reserve’s favored inflation measure—the Personal Consumption Expenditures (PCE) price index—rose 0.3 percent in June, pushing the year-over-year increase to 2.6 percent.

“Core” inflation, which excludes volatile food and energy costs for a clearer view of underlying trends, also climbed 0.3 percent monthly and 2.8 percent annually. These increases mark an acceleration compared to May’s year-over-year inflation rate of 2.4 percent and came in slightly higher than economists had forecast.

Spending Strengthens, Inflation Pressures Build

Consumer spending also saw a boost in June, signaling ongoing economic resilience. However, this uptick may further stoke inflation concerns and complicate the Federal Reserve’s monetary policy decisions. With prices creeping higher and spending remaining strong, inflation risks could influence future interest rate decisions.

Fed Faces Diverging Pressures on Policy

The Federal Reserve is caught between two competing economic signals. While slowing economic growth and signs of labor market cooling might typically justify lowering interest rates, inflation now exceeds the Fed’s 2 percent target. Much of the recent inflationary pressure stems from tariffs, many of which are scheduled to take full effect imminently.

Despite mounting pressure from President Trump to slash rates significantly, the Fed chose on Wednesday to maintain current interest levels for the fifth meeting in a row. The decision, though widely expected, was not unanimous—two members of the Board of Governors dissented, advocating for a cut, albeit not to the extent the White House has pushed for.

Outlook Hinges on Upcoming Data

Fed Chair Jerome Powell indicated that the central bank’s next move, expected in September, will be heavily influenced by incoming economic data—especially figures related to inflation and employment. While the June inflation report may not weigh heavily on that decision, it illustrates the growing impact of tariffs on price levels.

In particular, the data showed that goods categories sensitive to tariffs saw notable price increases: household furnishings rose by 1.3 percent in June, and recreational items—such as electronics—were up 0.9 percent. In contrast, service prices rose more slowly, a reversal from previous trends where service-sector inflation, particularly in housing, was the primary driver.

Conflicting Signals Cloud September Rate Decision

Harry Chambers, an economist at Capital Economics, noted in a client report that the June data “will do little to ease the Fed’s concerns about tariff-driven inflation.” He added that if these price pressures persist, a rate cut in September appears increasingly unlikely.

At the same time, some figures from the report might support the argument for rate relief. Personal income growth slowed in June and showed no gains when adjusted for inflation. Additionally, while overall consumer spending remained healthy, discretionary spending on services such as travel declined.

Labor Market Data Could Tip the Scale

The Fed will gain more clarity on economic momentum with the release of July’s job market data from the Labor Department. Hiring trends and unemployment figures will be crucial in shaping the central bank’s outlook and determining whether further rate adjustments are warranted in the near term.