Inflation slowed in June by its largest monthly drop since April 2020 on falling energy prices – though the slowdown might not be enough to put interest-rate cuts back on the table.
The Consumer Price Index rose 3.5% in June over the past 12 months, cooling off from 4.2% in May, the Bureau of Labor Statistics said Tuesday.
On a monthly basis, the inflation rate declined 0.4% – more than expectations of a 0.2% dip.
Core CPI – the Fed’s preferred inflation gauge, which excludes volatile food and energy prices – ticked down to 2.6%, still well above central bankers’ 2% goal.
“Tuesday’s weaker-than-expected CPI print suggests the inflation surge driven by the Iran war is fading, but this may just be a temporary relief as tensions have escalated in recent days,” Skyler Weinand, chief investment officer at Regan Capital, said in a note Tuesday.
“The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds, but…Warsh is looking to get consumer prices under control and the best tool the Fed currently has is raising interest rates.”
US crude oil plummeted roughly 25% in June as tanker traffic resumed through the Strait of Hormuz – and a steep 9.7% decline in gasoline prices drove the tamer-than-expected inflation reading, according to the BLS.
However, the US and Iran have since resumed fighting in the Middle East and President Trump last week said the ceasefire deal with Tehran is “over,” vowing not to negotiate with “scum.”
As of Tuesday, national average gasoline prices were $3.86 a gallon, according to AAA – about 7 cents higher than last week as prices reverse their decline.
Now all eyes are on Fed Chairman Kevin Warsh ahead of his testimony before the House Financial Services Committee Tuesday morning, where investors will be looking for any more signs of his hawkish, anti-inflation stance.
For now, investors can breathe a slight sigh of relief that June’s inflation report didn’t come in hotter than expected, which Fed Governor Christopher J. Waller had warned on Monday would likely result in interest-rate hikes soon.
However, he also argued that one good inflation print isn’t enough to shake off concerns about lasting price pressures – saying, “I will need to see several months of lower readings to feel that inflation is moving in the right direction.”
Fed officials have been torn between the risks of holding interest rates flat, which could fuel a long-term inflation problem, or raising rates too early, which could stunt economic growth.
Along with falling energy costs, auto prices helped drive June’s relatively tame inflation reading, as new vehicles stayed flat over the month and used cars and trucks fell 0.2% in June, down 1.8% over the past year.
Airfare ticked up 0.2% despite falling jet fuel costs, a sign that carriers are seeing strong enough travel demand over the summer to justify higher ticket prices.
Apparel prices plunged 0.6% in June, a substantial one-month drop and a signal that higher energy prices haven’t fully bled through to consumer goods – a concern since most food, clothing and furniture is transported via heavy trucks that run on diesel.
Food prices rose 0.2% in June.
Meanwhile, the artificial intelligence boom – which has caused chip shortages, sending prices higher for consumer tech including Apple computers and Xbox consoles – continued to raise prices.
Software jumped 2.3% in June and is up 17.4% over the past 12 months.
