Consumer prices fell in June by the most in more than six years, the Bureau of Labor Statistics reported Tuesday, as soaring energy prices at least temporarily eased this year’s spike in inflation.
The Consumer Price Index, a broad measure of the cost of goods and services across the U.S. economy, was generally weaker than expected. The CPI fell by a seasonally adjusted 0.4% in the month, bringing the annual inflation rate down to 3.5%.
Economists surveyed by Dow Jones had expected a 0.2% decline and 3.8% inflation, following May’s 4.2%. This was the largest monthly decline in headline inflation since April 2020.
Core inflation, which excludes food and energy, was unchanged month-on-month, bringing the 12-month inflation rate to 2.6%. Consensus forecasts were for an increase of 0.2% and 2.9%, respectively, following May’s 2.9% level.
The energy index fell 5.7% in June, the biggest monthly decline since April 2020, but it still rose 15.7% on an annual basis, driven by a 26.7% rise in gasoline prices. However, in June, both gasoline and fuel oil fell by more than 9%.
Additionally, service costs, which Federal Reserve policymakers are closely monitoring for long-term inflation trends, also fell significantly. Services excluding energy costs were flat, with shelters increasing by only 0.1% and transportation services decreasing by 0.3%.
Food prices rose 0.2%, but new car prices were flat and used cars and trucks fell 0.2%. Apparel prices, which are sensitive to both energy and tariff inputs, fell 0.6%.
Following this report, stock market futures were mostly positive, but yields on U.S. Treasuries fell sharply. Traders continue to expect the Fed to raise rates in September, but the probability has been lowered to 63% from more than 75% a day earlier, according to CME’s FedWatch futures price index.
The Fed currently targets its key overnight borrowing rate in a range of 3.5% to 3.75%.
“We finally saw some relief in inflation in June,” said Heather Long, chief economist at Navy Federal Credit Union. “This takes pressure off the Fed and allows the central bank to wait and see. The fear is that this relief package may not last long as the Iran war resumes. There is too much uncertainty to know what the outcome will be for inflation.”
Although the inflation data offered some hope, it is unlikely to motivate Federal Reserve officials to cut interest rates anytime soon, with the central bank widely expected to raise its benchmark rate in September. Federal Reserve President Christopher Waller said Monday it would take several months for positive readings to become confident that inflation is returning to the central bank’s 2% target.
The report follows harsh comments from Fed officials on inflation. After the June meeting, policymakers issued a statement in which they flatly stated that the Federal Open Market Committee, which sets interest rates, would “achieve price stability.”
New Fed Chairman Kevin Warsh has previously expressed the belief that interest rates could be lowered in the future, but since taking office in May he has made reining in inflation a central part of his message.
“The Fed’s primary objective is to get monetary policy right, or as close to it as possible,” Warsh said in remarks to Congress scheduled for Tuesday. “That is our clear and abiding goal, the star upon which we steer the ship. And if we get policy right, and we will, the inflation surge of the past five years will be a thing of the past.”
Depending on developments in the situation in the Middle East, the easing of inflation may be temporary.
The easing in hostilities caused oil prices to fall by about 25% in June, but last week President Donald Trump declared a cease-fire with Iran as the two countries exchanged attacks. Crude oil soared on Monday and rose again on Tuesday.
“The longer this dispute drags on, the more likely the Fed will have to raise rates and stand by the promise of price stability that Warsh made in his first meeting as chairman,” said Ryan Weldon, investment director at IFM Investors.
