The air was let out of the inflation balloon in June, with consumer prices dropping by the fastest level in six years—easing some concerns that the Federal Reserve would soon raise its benchmark interest rate.
The U.S. Bureau of Labor Statistics said Tuesday that June’s consumer price index (CPI), which measures the change in prices on a variety of consumer goods and services, rose by a seasonally adjusted 3.5% year-over-year—well below estimates for 3.8% and a steep decline from May’s 4.2% headline figure. The May reading was the hottest since May 2023. On a month-over-month basis, prices actually declined by 0.4%, which was better than expectations for growth of 0.2% and the biggest decline in prices since April 2020.
“Core” CPI—a measure of inflation that excludes food and energy costs (factors that are more volatile than the other prices tracked by the Labor Department)—was also plenty softer than expected. Core inflation came in flat MoM and up 2.6% YoY versus expectations of 0.2% and 2.9% growth, respectively.
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Stock markets bounced Tuesday morning, with Wall Street believing the report will stay the Fed’s hand at its next rate-setting meeting. But the reprieve on consumers might only be temporary.
“The well-behaved CPI print likely lowers pressure on the Fed to hike soon, but the reignition of hostilities in Iran means the prospect of hikes is far from over,” says Kay Haigh, global head and CIO of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management. “Concerns over energy supply through the Strait of Hormuz raises risks to the forward-looking inflation outlook, which could force the FOMC’s hand eventually. Although a path remains for rates to stay unchanged this year, the re-escalation of the conflict has narrowed it.”
Here’s a quick look at June’s key CPI figures:
- MoM CPI: +0.4% (estimate: +0.2%)
- YoY CPI: +3.5% (estimate: +3.8%)
- MoM Core CPI: Flat (estimate: +0.2%)
- YoY Core CPI: +2.6% (estimate: +2.9%)
Energy prices led the all-items index lower, falling 5.7% year-over-year after rising by nearly 4% in each of the past two months and 11% in March. That included a sharp 9.7% drop in gasoline and 9.2% decline in fuel oil. From a utility perspective, electricity prices dropped 1%, though natural gas climbed by half a point.
“For three months the open question was whether the energy shock would seep into the rest of the basket. June answers it about as clearly as a single report can,” says Jason Pride, Chief of Investment Strategy & Research at Glenmede. “The Iran-driven spike at the pump, however painful, has not metastasized into a broader inflation episode, and the window in which that spillover would typically show up is now largely behind us.”
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Prices eased in several other categories. Used car and truck prices came down 0.2% month-over-month and are now down 1.8% over the past year. Medical care commodities fell by the same amount and are off 2.1% over the past 12 months. Transportation services and medical care services also saw slight price declines.
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Still, continuing price growth in other areas don’t have all experts convinced that inflation worries are behind us.
Food prices continued to rise, however. Both food at home and away from home were up by 0.2% month-over-month in June. The former has grown by 2.7% year-over-year, while the latter is up by 3.4%. Shelter prices continue to moderate, up 0.1%.
“The underlying inflation picture remains uncomfortable,” says Sonu Varghese, Chief Macro Strategist at Carson Group. “Software prices continue to rise amid AI-related capacity constraints, while persistent restaurant inflation suggests demand remains strong.”
Fed Seen as Far Less Likely to Raise Rates in July
The report immediately scaled back worries that the Federal Reserve would raise its target range for the federal funds rate at the conclusion of its next Federal Open Market Committee (FOMC) meeting, scheduled for July 27-28.
The CME FedWatch Tool, which uses trading in federal-funds futures to determine Wall Street’s expectations for future Federal Reserve actions, shows an 83% chance that the central bank will maintain its current 3.50%-to-3.75% range later this month, and just a 17% chance that it will announce a quarter-point hike. The probability of a stay is up from 58% yesterday and 89% a month ago.
“This is great news for [Chair] Kevin Warsh and the Fed,” says David Russell, Global Head of Market Strategy at TradeStation, an online brokerage firm. “Kevin Warsh is staking out a hawkish position in his testimony by strongly linking inflation with monetary policy. That implies rate hikes might be needed to get prices under control. He also noted few layoffs, which could support tighter policy.”
That said, expectations didn’t change much for the end of the year. Wall Street futures heavily imply at least one rate hike by the December FOMC meeting.
“[The CPI report] strengthens the case that the inflation impulse keeping policy on hold was largely a one-off, and it should give the committee more room to lean toward supporting the labor market as the year progresses,” Pride says. “The caveat sits in the oil market rather than the inflation data: crude has shown signs of turning higher again, and a fresh energy shock arriving just as the last one clears would test that thesis. For now, the direction of travel on underlying inflation is constructive, and the market may be underestimating the likelihood of a cut later this year.
This report will be updated.
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