Inflation slowed in June by its largest monthly drop since April 2020 on falling energy prices – slashing the odds the Fed will raise interest rates at its meeting this month.
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.
The odds the Fed will hold interest rates at its July 29 meeting jumped to more than 83% – and the chances of a rate hike plummeted to roughly 16%, down from 40%, according to CME FedWatch.
“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…[Chair Kevin] 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.
In his testimony before the House Financial Services Committee Tuesday morning, Warsh doubled down on his hawkish, anti-inflation stance – vowing to lower prices.
The chairman refused to share forward guidance on the path of interest rates, though a strong anti-inflation stance typically indicates a bias toward raising rates, not lowering them.
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.