US CPI falls 0.4% as energy eases, but Fed hike looms
A sharp drop in US consumer prices driven by lower energy costs offers temporary reprieve, but escalating Middle East tensions keep a September rate hike firmly on the table.
US consumer prices fell 0.4% in June, the largest monthly decline since April 2020, pulling the annual inflation rate down to 3.5% and comfortably beating economist forecasts of 3.8%.
The headline drop was driven by a 5.7% plunge in the energy index, with gasoline and fuel oil costs each falling more than 9% during the month. Beneath the volatile energy component, the disinflationary trend broadened. Core prices, which exclude food and energy, were flat on the month and decelerated to a 2.6% annual rate, beating the 2.9% consensus forecast.
Services costs, a metric closely tracked by Federal Reserve policymakers for underlying inflation trends, also moderated. Services excluding energy were flat, shelter prices rose just 0.1%, and transportation services declined 0.3%. Apparel prices fell 0.6%, while used vehicle costs dropped 0.2%.
Treasuries rallied on the data, pushing yields sharply lower, while stock index futures advanced. However, traders still see a high probability that the central bank will execute a September hike. CME FedWatch data shows markets pricing a 63% chance of an increase, down from above 75% a day earlier but still a majority view.
The Fed currently targets its benchmark overnight borrowing rate in a range of 3.5% to 3.75%. Despite the cooling June figures, policymakers have signaled that a single positive report will not alter their restrictive stance. Fed Governor Christopher Waller said Monday it would take several months of favorable data to convince him inflation is sustainably returning to the 2% target.
New Chairman Kevin Warsh has made price stability the defining focus of his early tenure. "The Fed's number one objective is to get monetary policy right — or as near to it as we possibly can," Warsh said in prepared congressional remarks. "That is our clear and constant aim, the star we steer by. And if we get policy right — and we will — the inflation surge of the last five years will be a thing of the past."
The durability of the June price relief is highly uncertain, hinging on Middle Eastern geopolitics. The energy collapse followed a roughly 25% drop in oil prices as hostilities briefly eased, but President Donald Trump last week declared a ceasefire with Iran over after the two sides exchanged attacks. Oil prices spiked on Monday and continued rising Tuesday.
Ryan Weldon, investment director at IFM Investors, warned that sustained conflict increases the likelihood the Fed must hike to back Warsh's promise from his first meeting as Chair to "deliver on price stability."
