US inflation rises in June as tariffs fuel price increases

US inflation accelerated in June as import tariffs drove up the cost of consumer goods such as furniture, appliances, and recreational products, reinforcing expectations that the Federal Reserve will delay interest rate cuts until at least October. The Commerce Department reported on July 31 that the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, rose 0.3 per cent in June after an upwardly revised 0.2 per cent gain in May. On a year-on-year basis, inflation hit 2.6 per cent, up from 2.4 per cent in May and above the central bank’s 2 per cent target.

Core inflation, which excludes volatile food and energy prices, also rose 0.3 per cent on the month and remained at 2.8 per cent annually. Economists noted this sustained upward pressure is being driven by higher goods prices, especially in tariff-sensitive sectors. Furniture prices climbed 1.3 per cent, appliances jumped 1.9 per cent, and computers rose 1.4 per cent, some of the largest monthly increases in years.

Fed holds steady amid persistent inflation

The Federal Reserve kept its benchmark interest rate unchanged this week at 4.25-4.50 per cent, citing ongoing inflation risks. Fed Chair Jerome Powell emphasised the need for more data to determine whether recent inflationary trends are temporary or indicative of sustained pressure due to import duties imposed during President Donald Trump’s administration. While Powell refrained from offering a clear timeline for policy easing, financial markets, which had previously priced in a potential September cut, have now pushed back expectations.

Inflation-adjusted wages and incomes have also begun to feel the strain. Real disposable income was flat in June, despite a 0.3 per cent nominal income gain. The saving rate held at 4.5 per cent, indicating growing consumer caution.

Consumer spending holds, but outlook weakens

Despite rising prices, consumer spending edged up 0.3 per cent in June after being flat in May. Adjusted for inflation, spending rose a modest 0.1 per cent. Overall, the economy grew at a 3.0 per cent annual rate in the second quarter, boosted largely by a sharp drop in imports. However, underlying consumer demand remains tepid. Second-quarter spending grew at just a 1.4 per cent annualised pace, up from 0.5 per cent in Q1, suggesting households are becoming more cautious in the face of rising costs and a cooling labour market.

Initial jobless claims ticked up slightly last week, and economists expect the July employment report to show a higher unemployment rate of 4.2 per cent, up from 4.1 per cent in June. With core inflation remaining stubbornly above target and price pressures broadening, the Fed appears likely to keep rates higher for longer, weighing on economic momentum into the fall.