Tariff Price Hikes Crept Into The Fed’s Favorite Inflation Gauge In June

Inflation on the Rise

Inflation has been a major concern in recent months, and the latest data shows that it’s still on the rise. The Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred measure of inflation, rose 2.6% in June compared to the same time last year. This is higher than the 2.4% increase in May and above the Federal Reserve’s target of 2% annual inflation.

What’s Causing Inflation to Rise?

One of the main reasons for the increase in inflation is the tariffs imposed by the government. These tariffs have led to higher prices for certain goods, which are then passed on to consumers. Economists have noted that the cost of tariffs is being absorbed by businesses, but eventually, these costs are being passed on to consumers in the form of higher prices.

Core Inflation Remains High

The "core" PCE price index, which excludes the volatile prices of food and energy, rose 2.8% over the year. This is the same as in May and is tied for the highest level since February. This suggests that inflation is still a concern, even when excluding the prices of food and energy.

Consumer Spending is Slowing

As prices rise, consumers are becoming more frugal with their spending. After adjusting for inflation, consumer spending increased only 0.1% in June, erasing less than half of the 0.2% drop in May. This suggests that household budgets are becoming increasingly tight, and consumers are looking for ways to cut back on spending.

Impact on Consumers

The rise in inflation and subsequent slowing of consumer spending has a significant impact on consumers. As prices rise, consumers have less disposable income, which can lead to a decrease in spending on non-essential items. This can have a ripple effect on the economy, leading to slower economic growth.

What Does the Data Mean for the Fed?

The Federal Reserve has been keeping a close eye on inflation, and the latest data will likely influence their decision on interest rates. The Fed has kept its benchmark interest rate flat this year, in an effort to discourage borrowing and spending and stamp out high inflation. However, the stubbornly high inflation rate may lead the Fed to consider raising interest rates in the future.

Impact on Borrowing Costs

The high inflation rate has also kept borrowing costs high on all kinds of loans. This can make it more expensive for consumers and businesses to borrow money, which can lead to a decrease in spending and investment.

Conclusion

In conclusion, the latest data shows that inflation is still on the rise, driven in part by the tariffs imposed by the government. As prices rise, consumers are becoming more frugal with their spending, which can have a significant impact on the economy. The Federal Reserve will likely take the latest data into consideration when making decisions on interest rates, and consumers should be prepared for the potential impact on their borrowing costs and spending power.