After reaching a three-year high last month, the Federal Reserve’s preferred inflation gauge eased in June following declines in energy prices amid a temporary truce with Iran. This marked the first monthly decline in six years. However, the resumption of conflict and a rebound in oil prices have reignited inflation concerns, suggesting this relief may be reversed in the coming months. This could challenge the Fed’s commitment to its price stability mandate.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.7% in June from a year ago, following a 4.1% increase in May, according to the Commerce Department’s Bureau of Economic Analysis. That marked the slowest annual pace in three months. The “core” PCE price index, which excludes food and energy, rose 3.3% over the past twelve months, down from 3.4% last month and matching March and April levels.

Despite the elevated inflation, consumer spending remained resilient as larger tax refunds and strong stock market gains provided a cushion for household finances. Consumer spending rose 0.3% in June, and real spending, adjusted to remove inflation, increased 0.4%.

Meanwhile, personal income rose 0.2% in June. This growth was led by increases in compensation, personal income receipts on assets, and government social benefits that were partly offset by a decrease in farm proprietors’ income. Real disposable income—income adjusted for taxes and inflation—was up 0.3% in June. On a year-over-year basis, personal income was 3.9% higher, and real (inflation-adjusted) disposable income was up 0.5%.

With spending growth outpacing income growth, the personal saving rate edged down to 2.7% in June, the lowest level since July 2022, when core CPI was near its peak. The saving rate has declined every month since January 2026. With inflation eroding compensation gains, households are dipping into savings to support spending, especially amid higher energy costs from the Iran war.