Core PCE, the inflation gauge the Federal Reserve watches most closely, has hardly moved even as headline inflation retreated in June. Cleveland Fed projections show it edging higher again in July, a sign the price pressure has spread beyond energy. Asked about May’s figure, President Donald Trump answered that he loves the inflation.
Headline inflation is falling while the measure the Federal Reserve actually steers by is not. Projections from the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool show Core PCE easing to 3.33% in June from 3.4% in May. By July, the same tool estimates it will inch higher to 3.36%.
Core PCE excludes volatile food and energy costs, which is why it has long been a favorite inflation measure of the central bank’s policymakers. The Fed’s long-term inflation target is 2%, not zero.
Tariffs and the Strait of Hormuz lifted prices
Since April 2025 the US economy has absorbed two price shocks that trace back to Trump’s policies. The first was his tariff and trade policy; even after the US Supreme Court invalidated several of those tariffs in February 2026, they kept lifting prices in the goods sector.
The second shock is still running. After the president gave the US military the green light to attack on Feb. 28, Iran closed the Strait of Hormuz to most commercial vessels, halting the flow of a fifth of the world’s petroleum liquids, the largest energy supply disruption in modern history. Fuel prices soared within weeks, and trailing 12-month inflation spiked from 2.4% in February to a three-year high of 4.2% in May.
Trump has insisted that once the Iran war ends, oil prices would plunge and inflation would dissipate in short order. Questioned about May’s headline inflation figure, he answered: “I love the inflation.”
Peace talks cut fuel costs, then the conflict returned
To some extent, his words began ringing true in June. With peace talks advancing at the time, crude oil prices plummeted, and the resulting decline in fuel prices slashed trailing 12-month inflation to 3.5%. But conflict between the US and Iran has escalated again in recent weeks, closing the Strait of Hormuz once more.
Several factors are likely keeping Core PCE firm: businesses altering shipping routes and supply chain sourcing, rising prices for petroleum-based inputs such as plastics and synthetic polymers, and higher energy costs raising downstream production costs. Those added costs eventually pass to consumers.
The Fed adds AI demand to the list
Beyond energy, the Federal Open Market Committee singled out demand for AI infrastructure as an inflation driver in its June meeting minutes. The pricing power that chipmakers and memory and storage companies are enjoying will trickle down to consumers and raise prices.
Energy supply shocks are often short-term events, but sticky Core PCE and AI-driven price pressure threaten to linger, which would give the FOMC valid justification for an interest rate hike.
Source: The Motley Fool
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