Key inflation gauge falls while economic growth slows – but the Fed could still raise rates

• Core PCE, the Fed's preferred inflation measure, rose 3.3% annually (up 0.1% from prior month), but Chair Kevin Warsh emphasized 'one good print won't change the trajectory of monetary policy' and three Fed colleagues voted to raise rates
• The inflation decline is attributed to a 9% drop in June energy prices following a temporary US-Iran ceasefire that has since collapsed, with gas prices rebounding above $4/gallon and Middle East tensions threatening supply routes
• Despite weaker GDP growth, underlying economic strength persists: consumer spending surged 3.2% annually in Q2 (versus 0.5% in Q1) and business investment rose 15% driven by tech sector data center buildouts

Summary

The Personal Consumption Expenditures (PCE) price index declined to 3.7% in June from 4.1% the previous month—marking its first drop in six years. Core PCE, the Federal Reserve's preferred inflation measure excluding food and energy, rose 3.3% annually, up 0.1% month-over-month.

However, analysts warn this decline may be temporary. The drop was driven primarily by a 9% fall in energy prices following a US-Iran ceasefire agreement that has since collapsed. Gasoline prices have rebounded above $4 per gallon, and escalating Middle East tensions—including US strikes against Iran and Red Sea attacks—threaten global energy supplies.

Second-quarter GDP growth came in at 1.5%, below the 1.8% forecast, but showed underlying strength. Consumer spending surged 3.2% annually (versus 0.5% in Q1), rising 0.4% month-over-month in June when adjusted for inflation. Business investment jumped 15%, fueled by tech sector spending on memory chips and data centers.

Despite the positive inflation data, markets expect the Fed to maintain its hawkish stance. Fed Chair Kevin Warsh delivered a "hawkish hold" Wednesday, keeping rates steady while emphasizing the need to control inflation. Three colleagues voted for a rate increase, and Warsh signaled the Fed is exploring alternative inflation measurements beyond PCE.

Former Goldman Sachs analyst Nic Puckrin noted "one good print won't change the trajectory of monetary policy," warning that a September rate hike "remains fully on the table." Sustained inflation improvement will be needed to shift Fed policy, which appears unlikely if Middle East tensions keep oil prices elevated. Borrowing costs for credit cards and loans will remain expensive for the foreseeable future.