U.S. June CPI Up 3.5% Year-Over-Year... First Monthly Decrease in Six Years

Pressure for a July Rate Hike Eases
Significant Impact from Falling Energy Prices

Last month, aided by a drop in international oil prices, the U.S. consumer price inflation rate slowed more rapidly than expected. As price pressures eased not only for energy but also for a wide range of goods such as clothing, used cars, and auto insurance, the likelihood of the U.S. central bank, the Federal Reserve (Fed), raising interest rates this month has significantly decreased. However, some analysts point out that inflationary concerns have not been fully resolved, as international oil prices are soaring again due to renewed military clashes between the U.S. and Iran.

Products displayed at a New York supermarket. New York (USA) – Special Correspondent Yoonjoo Hwang

The U.S. Department of Labor's Bureau of Labor Statistics announced on July 14 (local time) that the Consumer Price Index (CPI) for June rose by 3.5% year-over-year. The inflation rate slowed considerably compared to May (4.2%) and was also below the Dow Jones consensus forecast of 3.8%.

On a month-over-month basis, the CPI dropped by 0.4%, a larger decline than the market’s estimate of -0.2%. This was the steepest monthly decline since April 2020, during the onset of the COVID-19 pandemic, when it fell by 0.8%.

Previously, due to the blockade of the Strait of Hormuz amid a U.S.-Iran conflict, the monthly CPI had surged by 0.9% in March and recorded further increases of 0.5–0.6% in April and May, fueling renewed fears of inflation. However, after a U.S.-Iran ceasefire memorandum of understanding (MOU) was reached last month, the plunge in international oil prices greatly reduced consumer price pressures.

Energy prices fell by 5.7% month-over-month. Notably, gasoline prices alone dropped by 9.7% in a single month, driving the overall CPI decline. However, compared to the same month last year, energy prices rose by 15.7%, remaining a key factor in keeping the annual inflation rate elevated.

The core CPI, which excludes energy and food, rose by 2.6% year-over-year, showing a slower pace than May’s 2.9%. It was flat on a month-over-month basis. The market had forecast the core CPI to increase by 2.9% year-over-year and 0.2% month-over-month.

The core CPI is considered an indicator of the underlying trend of inflation, as it excludes volatile energy and food prices. More specifically, price slowdowns appeared relatively widespread across categories. Used car and truck prices declined by 0.2% month-over-month, while clothing prices fell by 0.6%. Prices for auto insurance and medical services also dropped, and the increase in housing costs was the smallest since 2021. Service prices excluding energy services were also unchanged from the previous month.

Service prices excluding housing and energy—which are closely watched by the Fed—also fell by 0.2% month-over-month. Declines in auto insurance premiums, telecommunications services, and hotel prices all contributed to bringing down the overall inflation rate.

However, some point out that such price declines for certain items are unlikely to persist. Omair Sharif, CEO of Inflation Insights, stated that the falls in auto insurance, wireless data services, and hotel prices were major contributors to the June inflation decrease, but added, "It is hard to expect these improvements to repeat over the next few months."

The Case for a July Rate Hike Weakens... Waller: "We Will Not Tolerate Inflation"

With June inflation numbers coming in well below expectations, the prospect of a Fed rate hike this month has decreased significantly. According to The Wall Street Journal, before the release of the CPI data, the interest rate futures market reflected about a 40% probability that the Fed would raise rates by the end of this month, but immediately after the data was published, that probability dropped to around 15%.

Previously, hawkish members within the Fed had argued for a rate hike this month based on the view that price shocks caused by tariffs, war, and increased investment in artificial intelligence (AI) were spreading beyond isolated effects into the broader economy. However, this latest CPI report is seen as weakening the case for an immediate rate hike—at least in July.

Fed Chairman Kevin Warsh also reaffirmed the Fed's resolve not to tolerate persistently high inflation. In a pre-released statement ahead of his appearance at the House Financial Services Committee hearing, Warsh said, "Our committee members do not tolerate persistently high levels of inflation and share a strong commitment to restoring price stability."

He further emphasized, "If we conduct monetary policy correctly—and we will do just that—the surge of inflation seen over the past five years will become a thing of the past."

Previously, Fed Governor Christopher Waller said in a public speech the day before, "If the core inflation data released this week comes in high again, the Federal Open Market Committee (FOMC) should consider tightening monetary policy in the short term."

However, with the actual core CPI for June coming in well below market expectations, calls for an immediate rate hike at the July meeting are expected to lose momentum.

This content was produced with the assistance of AI translation services.