The Federal Reserve’s preferred inflation gauge eased slightly in June, with the personal consumption expenditures price index falling 0.1% for the month β the first monthly decline in six years β even as the annual inflation rate remained well above the Fed’s 2% target. The Bureau of Economic Analysis reported July 30 that the PCE index rose 3.7% year over year, down from 4.1% in May and the slowest annual pace in three months.
Core PCE, which excludes volatile food and energy prices and is the metric Fed officials watch most closely, rose 3.3% year over year, down from 3.4% in May and matching the readings from March and April. On a monthly basis, core PCE ticked up 0.1%, a more modest gain than the flat-to-declining headline number.
Consumer spending held up despite the inflation pressure. Personal consumption expenditures rose $65.2 billion, or 0.3%, in June, with services spending contributing $58.2 billion of that increase and goods spending adding $7.0 billion. Real PCE β spending adjusted for inflation β grew 0.4%. Personal income rose $54.9 billion, or 0.2%, driven by higher compensation, investment income and government social benefits, though the gain was partly offset by declining farm income.
The report’s most notable signal may be in the savings data: the personal saving rate fell to 2.7% of disposable income in June, the lowest level since July 2022. That decline suggests households are increasingly drawing down savings to sustain spending rather than relying solely on income growth, a pattern that becomes harder to maintain the longer elevated prices persist.
The National Association of Home Builders, in its own analysis of the BEA data, attributed June’s monthly easing largely to falling energy prices tied to a temporary truce involving Iran, cautioning that the relief could prove short-lived if energy costs rebound. NAHB’s analysis also noted the reading complicates the Fed’s inflation-fighting mandate: a headline number moving in the right direction on a monthly basis, but an annual rate still nearly double the central bank’s target.
Disposable personal income β income after taxes β rose $48.3 billion, or 0.2%, in June, roughly in line with the overall income gain. But that income growth trailed the pace of spending growth closely enough that the saving rate slipped rather than held steady, a dynamic economists watch as an early warning sign of consumer fatigue. May’s spending growth had been notably stronger, with nominal PCE up 0.9% for the month, making June’s more modest 0.3% gain a visible deceleration in consumer momentum even before accounting for inflation.
What it means
For housing markets, PCE inflation matters chiefly through its influence on the Fed’s rate path and, by extension, mortgage rates. The mixed report β monthly improvement but annual inflation still elevated, alongside a shrinking savings cushion β gives the Fed little clear justification to cut rates in the near term. That aligns with the Fed’s recent decision to hold rates steady in a rare 9-3 vote, with three officials pushing for a hike rather than a cut. Mortgage rates have followed that hawkish tilt higher: Freddie Mac has reported rates climbing to 6.66%, the highest level in a year. Until inflation shows more sustained annual improvement, homebuyers should expect the current rate environment β and the affordability pressure that comes with it β to persist.
