By Andrew Miller
The Federal Reserve’s primary price gauge just hit its highest level in three years.
The personal consumption expenditures index (PCE), a key number the Fed watches when deciding on interest rates, came in at 4.1% annually in May. That’s up from 3.8% in April, and the highest reading since April 2023.
Core PCE, which strips out food and energy, clocked in at 3.4%. The culprit isn’t a mystery. The Iran war sent oil and gasoline prices through the roof earlier this year, and those costs have been bleeding into everything else ever since.
While new Fed Chair Kevin Warsh has expressed his desire to curb inflation, no moves have been made. A rate hike is expected this September.
At last week’s meeting, the FOMC held rates steady at 3.50%–3.75%. But they also took a rate cut off the table and signaled at least one hike before year-end. Warsh plans to prioritize price stability, especially since the Fed has missed its 2% target for the past five years in a row.
Despite the widespread price increases bolstered by tariffs, the economy is in a relatively strong position. GDP rose to 2.1% in Q1, up from 1.6% prior, and jobless claims came in below expectations.
Here’s where it gets interesting for small business owners: despite rising prices, consumers keep spending. Personal spending rose 0.7% in May, alongside a 0.7% increase in personal income.
People are still buying. But look at how they’re doing it. The personal savings rate sits at 3%, down from 5.5% just over a year ago. Consumers aren’t flush with cash. They’re pulling from their safety nets.
When savings run thin, customer traffic will follow suit. Whatever rate your business qualifies for today is more favorable than it will be after September’s expected rate hike. If you’re planning to borrow capital in the next six months, now is the time to explore your options.
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