Inflation Rises Sharply on PCE Data—Will Fed Hold Off on Rate Cuts?

PCE Index Posts Largest Monthly Gain Since February

Inflation accelerated in June, with the Personal Consumption Expenditures (PCE) index rising 0.3%—the largest increase in four months. According to the Bureau of Economic Analysis, this pickup in price growth may reflect the delayed pass-through of elevated U.S. tariffs, adding pressure to the Federal Reserve’s inflation-fighting mandate.

Core PCE, which excludes food and energy and is more closely monitored by the Fed, also rose 0.3% on the month. On a year-over-year basis, headline inflation rose to 2.6% from 2.4%, while core inflation held steady at 2.8%. However, revised data showed last month’s core rate was higher than previously reported, pushing both metrics further above the Fed’s 2% target.

Tariff Effects Begin Filtering Into Inflation Readings

The inflation upturn appears to be linked to the delayed impact of U.S. trade policy. While initial reactions to tariffs were muted, June’s data suggests that price pressures are finally working through supply chains. Traders should note that although the rise is not as steep as initially feared, the direction of travel is upward, raising concerns that tariff-related costs are becoming embedded.

Fed officials are signaling caution. Despite headline inflation that might typically justify a rate cut, the central bank is expected to hold off. Policymakers are looking for more data to determine whether inflationary pressures from tariffs are temporary or more persistent. For traders, this means that earlier assumptions of a rate cut in the fall are now in doubt.

Equity Markets Mixed, Treasury Yields Edge Lower

Despite the inflation beat, equity markets showed limited reaction. The Dow Jones Industrial Average slipped 0.38%, while the S&P 500 declined 0.12%, although both indexes were set to open higher Thursday after the White House announced new trade agreements. Meanwhile, the 10-year Treasury yield ticked down to 4.337%, reflecting a cautious bid for safety as rate cut expectations waver.

Market Forecast: Fed Cut Looks Less Likely for Now

With both headline and core PCE above target and tariff effects gaining traction, traders should temper expectations for a near-term Fed rate cut. The central bank appears poised to adopt a wait-and-see approach, especially with inflation showing signs of persistence. Short-term outlook for risk assets is neutral to slightly bearish, particularly if bond yields stay elevated and Fed policy remains on hold.