US inflation moderated in June but remains elevated. The personal-consumption expenditures price index cooled from prior months while staying well above the Federal Reserve's 2% target, data from the Bureau of Economic Analysis showed Thursday.
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PCE inflation cools in June, keeping Fed on hold above 2% target
US inflation moderated in June but remains elevated. The personal-consumption expenditures price index cooled from prior months while staying well above the Federal Reserve's 2% target, data from the Bureau of Economic Analysis showed Thursday.
The PCE price index, the Fed's preferred inflation gauge, eased in June after running hot through the first half of 2026, though the deceleration has not yet brought the measure within striking distance of the central bank's goal. The report lands as Fed Chair Kevin Warsh and his colleagues weigh whether the current 3.50% to 3.75% fed funds rate is restrictive enough to complete the inflation fight.
"The moderation is welcome, but the level remains too high for the Fed to declare victory," said James Okafor, a former Financial Times reporter covering the Fed and Treasury. "The committee needs to see a sustained trend toward 2%, not just a single month of improvement."
Core PCE, which strips out volatile food and energy categories, has fallen sharply from its 6.6% peak in September 2022 to 2.6% by March 2025, according to historical data. But progress has stalled since then, with the index hovering well above the Fed's target through the first half of 2026. The June reading extends a pattern of sticky inflation that has kept the central bank on hold after three consecutive 25-basis-point rate cuts in the second half of 2025.
The data complicates the outlook for the Fed's September 15-16 meeting, where officials will update their Summary of Economic Projections. Overnight-index-swap markets have priced in an uncertain path, with traders split on whether the next move will be a cut or a hike as headline inflation remains elevated. The three dissents at the July FOMC meeting — where three of 12 members voted for a quarter-point rate increase — underscored the internal divide.
Energy costs have added to the challenge. Middle Eastern conflicts have pushed oil and gas prices higher, creating a ripple effect through transportation, utilities and food costs. JPMorgan economists forecast GDP growth of 1.5% to 2.0% amid resilient consumer spending and robust AI-related capital expenditure, but rising energy prices threaten to keep headline inflation from converging with the core reading.
The last time the Fed faced a similar inflation trajectory was in 1994-1995, when then-Chair Alan Greenspan executed a soft landing by raising rates preemptively and then cutting as the economy cooled. The fed funds rate nearly doubled to 6% over seven moves before the central bank reversed course. Today's committee faces the mirror image: having cut rates through 2025, it must now decide whether the easing went too far.
What happens next hinges on the August and September data releases. If PCE continues to cool, the Fed may hold steady through year-end, allowing the lagged effects of past tightening to work through the economy. If inflation reaccelerates, the hawkish minority at the July meeting could gain support for a rate increase before year-end.
This article is for informational purposes only and does not constitute investment advice.
