Inflation cooled more sharply than analysts had anticipated in June, dropping to a 3.5% annual pace from 4.2% in May, as a pullback in gasoline prices helped ease overall price pressures, Labor Department figures released Tuesday showed.
By the numbers
Economists surveyed by financial data provider FactSet had expected inflation in June to come in higher, at a 3.9% annual rate.
The softer inflation report followed three straight monthly increases that had lifted the consumer price index to its highest point in more than three years. The slowdown was largely driven by cheaper energy, with gasoline prices falling 9.7% in June compared with the previous month.
That drop marked the steepest monthly decline since April 2020, according to the Bureau of Labor Statistics.
As oil and gasoline prices continued to retreat in June and early July, the May reading may end up being the high point for inflation this year, Oxford Economics said in a July 14 report.
The CPI measures how prices change over time for a broad basket of goods and services commonly purchased by consumers.
Core CPI, which strips out the often-volatile food and energy categories, increased at a 2.6% annual rate, slowing from 2.9% in May and coming in below economists’ forecasts.
The weaker-than-expected inflation reading follows a memorandum of understanding signed by the U.S. and Iran last month, which put a 60-day ceasefire in the war into effect.
However, tensions between the two countries have since flared as they vie for control of the Strait of Hormuz.
“A serious re-escalation of the conflict would threaten to revive the key upside risk to inflation and raise the odds of rate hikes,” Goldman Sachs analysts said in a research note before Tuesday’s CPI release.
What experts are saying
Experts cautioned that today’s CPI figure doesn’t reflect the recent rise in energy prices driven by renewed tensions between the U.S. and Iran.
On Tuesday, the price of Brent crude, the international benchmark, shot up to a one-month high of more than $86 a barrel after President Trump said the U.S. would reinstitute a military blockade in the Strait of Hormuz.
The national average for gasoline sat at $3.86 a gallon on Tuesday, according to AAA, down from a peak of more than $4.50 in May but still above the sub-$3-a-gallon level before the war started.
“Oil and gasoline prices — the main reason inflation eased in June — have started to edge back up on renewed US-Iran tensions, but the CPI won’t reflect this for another month,” Nic Puckrin, a markets expert and former Goldman Sachs analyst, said in an email.
Slowing inflation also offered a reprieve for consumers, who have been grappling with higher energy prices due to the war, said Heather Long, chief economist at Navy Federal Credit.
“This is good news for the nation, for the Federal Reserve and for many middle-income and moderate-income Americans who were desperate for some relief on inflation,” she said in an email.
However, it’s too soon to tell whether the drop in prices will last, she said. “The concern is that this relief will be short-lived as the war in Iran restarts,” Long added.
What this means for the Federal Reserve
Last month, nearly half of Federal Reserve policymakers signaled they would be open to raising interest rates later this year. However, experts said Tuesday that June’s cooler inflation reading will likely keep the central bank on the sidelines for now.
CME Group’s FedWatch tool showed a 86% probability that the central bank would hold rates steady following the CPI release.
“After today’s benign core inflation release, it appears less likely that the FOMC will raise rates over the next few meetings,” Jeffrey Roach, chief economist for LPL Financial, said in an email. “However, we may still be at an inflection point, given the risk that the energy shock could spill over into other categories of consumer prices.”
The Federal Reserve is scheduled to make its next interest rate decision on July 29.
Aimee Picchi
