US inflation cools to 3.5% in June as energy retreat eases pressure

U.S. consumer inflation slowed more than expected in June, with the headline CPI rising 3.5% from a year earlier — below the 3.8% consensus — as a sharp drop in gasoline prices provided the biggest disinflationary jolt since early 2020.

"After today's benign core inflation release, it appears less likely that the FOMC will raise rates over the next few meetings," said Jeffrey Roach, chief economist at LPL Financial. "However, we may still be at an inflection point, given the risk that the energy shock could spill over into other categories of consumer prices."

The CPI fell 0.4% month-on-month, the largest one-month decline since the pandemic-era deflation, versus expectations for a 0.1% drop. Core CPI, which strips out food and energy, was unchanged month-on-month — below the 0.2% forecast — and rose 2.6% year-on-year, down from 2.9% in May. Energy prices tumbled 5.7% for the month, with gasoline sliding 9.7%, as a fragile U.S.-Iran ceasefire briefly eased supply fears. The pullback in gasoline was the primary driver: regular unleaded prices were still up more than 27% from a year ago even with the June decline, according to Brian Jacobsen, chief economist at Annex Wealth Management.

The reprieve may be short-lived. Brent crude has surged back above $86 a barrel — up from a low near $70 in late June — after the ceasefire collapsed and commercial tankers came under fire in the Strait of Hormuz, triggering U.S. military strikes. "June's dip in energy costs may not last," said Atsi Sheth, chief credit officer at Moody's Ratings. "Revived geopolitical tensions in the Strait of Hormuz could reverse that relief quickly." With gasoline prices already reversing, the July CPI print could erase June's progress.

Fed Chair Kevin Warsh heads to Capitol Hill on Tuesday for his first congressional testimony, where his prepared remarks signal "no tolerance" for persistently elevated inflation. The fed funds rate has stood at 5.25% to 5.5% since July 2023, and markets now price an 83% probability of a hold at the July 28-29 meeting, up from roughly 60% before the data. Yet Fed Governor Christopher Waller said on July 13 that "any serious policy rule calls for raising the policy rate to bring down inflation," signaling the central bank is reassessing the case for a preventive rate hike.

Beyond energy, a new source of price pressure is emerging from the artificial-intelligence buildout. Semiconductor producer prices rose 25% from a year earlier in May — the fastest pace in four decades — as AI data-center expansion strains chip supply. Apple raised prices on some computers and tablets by 15% to 25% in late June, citing memory and storage shortages tied to AI infrastructure. Software and accessories prices climbed 17.4% year-on-year, though the category accounts for only 0.035% of the CPI basket. "The long-awaited deflationary component of AI is starting to show up," said Jamie Cox, managing partner at Harris Financial Group, arguing that productivity gains from AI will eventually offset cost pressures.

Stocks rose modestly after the report, with the S&P 500 adding 0.3% and the Nasdaq climbing 0.6%. Treasury yields fell, with the two-year note dropping seven basis points to 4.189% and the 10-year declining four basis points to 4.571%. The dollar weakened 0.6% to 100.7 against a basket of major currencies.

The last time headline CPI decelerated this sharply was in April 2020, when pandemic lockdowns crushed demand. That comparison underscores how dependent the current disinflation is on a single factor — energy prices — and how quickly it could reverse. If oil holds above $85 through July, the energy component alone could add 0.2 to 0.3 percentage points to the monthly headline CPI, potentially pushing the year-on-year rate back toward 4%.

This article is for informational purposes only and does not constitute investment advice.