U.S. June PCE unexpectedly turned negative, the first such reading since 2020; second-quarter GDP appeared to slow, but domestic demand hit a two-year high.

The U.S. June PCE Price Index, released today, fell 0.1% month-over-month—the first monthly decline since the 2020 COVID-19 outbreak. Its year-over-year growth slowed to 3.7% from a three-year high of 4.1% in May. Core PCE rose just 0.1% month-over-month, with its year-over-year rate dropping to 3.3% from 3.4%, though it remained above the Federal Reserve’s 2% target for the sixth consecutive year. The cooling inflation was largely driven by falling oil prices following the temporary U.S.-Iran ceasefire. Consumer spending remained robust: inflation-adjusted consumer spending in June rose 0.4% month-over-month, matching the fastest pace since July 2025. The second quarter’s annualized GDP growth slowed to 1.5% from 2.1% in the first quarter, but domestic private final sales (excluding net exports, inventories, and government spending) jumped 3.9%—more than doubling the first-quarter figure and hitting its highest level since early 2023. Consumer spending, which makes up roughly two-thirds of the economy, surged from 0.5% to 3.2%. Low unemployment, tax cuts, and the AI investment boom have jointly supported household consumption and corporate capital expenditure. However, energy prices remain a key risk for the second half of the year: the average regular gasoline price in Q2 hit $4.22 per gallon, far above the sub-$3 level before the conflict, and oil prices have risen again this month. Consumer goods firms including Procter & Gamble have noted consumers are more price-sensitive. The day before the GDP report’s release, the Federal Reserve voted 9-3 to hold interest rates steady at 3.5% to 3.75%. Three regional Fed presidents dissented, pushing for a 25-basis-point rate hike. Waller said, “The economy is showing impressive resilience.” The expanding camp of rate-hike advocates underscores growing internal divisions within the Fed.