Prices fell in June, but inflation did not disappear.
The Personal Consumption Expenditures Price Index (PCEPI), the Federal Reserve’s preferred measure of inflation, declined 0.1 percent in June, according to new data from the Bureau of Economic Analysis. It was the first monthly decline in the index since April 2020 and a sharp reversal from the 0.5 percent increase recorded in May. Even so, the PCEPI rose at an annualized rate of 4.4 percent over the last six months and is 3.7 percent higher than a year ago.
Core inflation, which excludes volatile food and energy prices, continued to rise. Core PCEPI increased 0.1 percent in June and has risen at an annualized rate of 3.8 percent over the last six months, and is 3.3 percent higher than a year ago.
June’s decline was largely an energy story. Energy prices surged earlier this year after conflict in the Middle East disrupted oil production and shipments through the Strait of Hormuz. In June, tanker traffic resumed and supplies began to recover, pushing crude prices sharply lower. The resulting drop in energy prices is welcome news for consumers. But it tells us little about whether inflation has been brought under control.
An energy shock changes relative prices. When supplies contract, energy becomes more expensive relative to other goods and services. When supplies recover, some of that increase reverses. These swings can push headline inflation sharply higher or lower from one month to the next without resolving the broader question: Is total spending growing at a rate consistent with price stability?
The clearest sign that monetary policy may remain too loose comes from nominal spending — the dollar value of all final goods and services produced in the economy. Nominal spending grew at an annualized rate of 7.9 percent in the second quarter. Measured from the second quarter of 2025 to the second quarter of 2026, nominal spending increased by 6.5 percent. By comparison, nominal spending grew at an average annual rate of roughly 4.1 percent from 2015 through 2019.
Over time, nominal spending cannot consistently outpace the economy’s productive capacity without generating inflation. If real output can grow around 2.5 percent per year, nominal spending growth of roughly 4.5 percent would be consistent with the Fed’s 2 percent inflation target. Spending growth near 6.5 percent leaves a gap of about two percentage points.
Quarterly figures fluctuate, and monetary policy affects the economy with a lag. The Fed should not react mechanically to a single nominal spending report any more than it should react mechanically to a single inflation report. But if nominal spending continues to grow near its current pace, it will exert persistent upward pressure on prices. Recent core inflation data reinforce that diagnosis: underlying inflation has run close to 4 percent over the past six months despite June’s decline in the headline index.
At its meeting earlier this week, the Federal Open Market Committee held its target range for the federal funds rate at 3.5 to 3.75 percent. Three members dissented in favor of a quarter-point increase. Fed Chair Kevin Warsh also warned against declaring victory on the strength of one favorable report. More than five years of above-target inflation, he said, “cannot be cured in nine weeks—or by a single month of modest price decreases.” Later, when asked how much June’s favorable consumer price index report influenced the decision to hold rates steady, he answered: “not much.”
That warning applies just as well to the latest PCE report.
One month of falling prices is welcome. It is not the same as restored price stability. Headline inflation remains well above 2 percent, core inflation remains elevated, and nominal spending continues to grow too rapidly. The inflation fight will not be over until nominal spending settles onto a path consistent with the economy’s productive capacity.
The Fed bears primary responsibility for putting it there.
