Lower Inflation Needed for Fed Decrease in September

By the Editorial Team · Friday, July 31, 2026

The U.S. core inflation eased slightly in June for the first time in six years while economic growth slowed to 1.5% annualized in Q2, below expectations. However, ongoing geopolitical tensions and rising energy prices could sustain inflation pressures, keeping the Federal Reserve inclined to maintain or raise interest rates in the near term.

A key measure of inflation in the United States declined for the first time in six years in June, while economic growth slowed more than anticipated, potentially giving the Federal Reserve greater flexibility to maintain current interest rates. The Bureau of Economic Analysis reported Thursday that the Personal Consumption Expenditures (PCE) price index increased 3.7% year-over-year in June, down from 4.1% in May. Meanwhile, the core PCE index, which excludes volatile food and energy prices and is the Fed’s preferred gauge of inflation, rose 3.3% annually, a slight increase of 0.1 percentage point from the previous month.

Despite these figures, experts caution that the recent dip in inflation could be temporary. The decline largely reflects a 9% drop in energy and gasoline prices in June, which followed a brief cease-fire agreement between the United States and Iran. That agreement has since collapsed amid renewed hostilities, with the U.S. announcing on Thursday a “heavy wave of strikes” against Iran in response to intercepted attacks on U.S. forces in Jordan. Tehran has warned of further escalation.

These developments coincided with a rebound in average national gasoline prices, which AAA reported surpassed $4 per gallon again. Additionally, attacks in the Red Sea threatening critical maritime trade routes in the Middle East risk further disruptions to the global energy supply.

Market analyst Nic Puckrin, formerly of Goldman Sachs, said the latest PCE data is unlikely to alter the Fed’s policy trajectory. After Chair Kevin Warsh’s recent decision to keep interest rates steady with a hawkish stance, Puckrin noted that policymakers will require a sustained reduction in inflation before considering rate cuts. He indicated that ongoing tensions in the Middle East and persistent elevated oil prices could maintain upward pressure on inflation, keeping a September rate hike possible. This outlook suggests that borrowing costs on credit cards and loans may remain high in the near term.

The economic growth report accompanying the inflation data painted a mixed picture. The U.S. economy expanded at an annualized 1.5% rate in the second quarter, falling short of the 1.8% forecast. Fed officials continue to weigh the risk of raising rates too quickly—potentially curbing growth—against the danger of allowing inflation to escalate. A slower GDP growth figure may support arguments for holding rates steady.

However, analysts pointed out that second-quarter figures were distorted by temporary factors, including the conflict in Iran, elevated oil prices, and earlier tariff measures implemented under President Trump. Beneath these shock effects, underlying economic signals showed strength: consumer spending grew at a robust 3.2% annual rate during the quarter, a sharp improvement over the 0.5% pace in the first quarter. Inflation-adjusted spending also rose 0.4% in June compared to May. Business investment surged 15% in the period, driven by significant outlays on memory chips and large-scale data center projects by major technology companies.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.