US inflation cools to 3.5% in June as gasoline prices drop

US consumer prices rose 3.5% in June, the slowest pace since March, as falling gasoline prices gave Americans relief from elevated inflation.

US inflation cooled more than expected in June as gasoline prices tumbled, giving the Federal Reserve room to hold rates steady and offering consumers relief after months of rising prices.

"The expected deceleration in headline inflation would largely be due to the dissipating effects of the oil price shock," Elizabeth Renter, senior economist at NerdWallet, said before the release.

The consumer price index fell 0.4% from May, the largest monthly decline in four years, the Labor Department said Tuesday. Core prices, which exclude food and energy, were unchanged month-over-month — below the 0.2% increase economists had forecast. On a yearly basis, core inflation slowed to 2.6% from 2.9% in May.

The data shifts the debate at the Federal Reserve, where policymakers are divided between those pushing for a rate hike and those willing to wait. Markets now price an 83% probability the Fed holds rates at its July 28-29 meeting, up from roughly 60% before the report, according to CME FedWatch.

The headline reading matched the 3.5% year-over-year increase in nominal wages reported last week, breaking a streak of declining real wages for American workers. That parity offers some relief to households that have seen purchasing power erode, though lower-income consumers remain under pressure. Numerator data showed prices for everyday household purchases rose 35.7% for low-income consumers since January 2018, compared with a national average of 33.8%.

Energy prices rose 15.7% from a year ago, down sharply from the 23.5% increase in May that reflected the initial shock of the Iran conflict. Gasoline prices climbed 26.7% year-over-year, less than half the 40.5% pace recorded the prior month. The moderation followed a fragile ceasefire in the Persian Gulf that allowed oil markets to stabilize.

The improvement may prove temporary. Oil prices jumped Monday after the United States renewed attacks on Iran and President Donald Trump announced a new blockade in the Strait of Hormuz, a shipping route that handles about one-fifth of the world's oil supply. Brent crude rose 9.6% to $83.30 a barrel. Gas prices, which averaged $3.87 a gallon nationwide Monday, have already rebounded 7 cents from a week earlier, according to AAA.

Fed Divided on Next Move

The Federal Open Market Committee remains split on the path forward. Minutes from the Fed's June 16-17 meeting showed roughly half of policymakers support raising interest rates by year-end, while the other half are willing to wait for clearer signs that inflation is sustainably declining. Chair Kevin Warsh, who took office May 22, has declined to signal the central bank's next move but has emphasized the Fed's focus on returning inflation to its 2% target.

Fed Governor Christopher Waller, who had favored rate cuts earlier this year, warned last week that another hot core inflation reading could force the central bank to tighten policy. "If we get another hot reading on core inflation this week, then the Fed will need to consider tightening monetary policy in the near term," Waller said in a speech in New York.

The labor market is also cooling. The economy added 57,000 jobs in June, well below expectations, with leisure and hospitality employment dropping sharply. Slower job growth reduces pressure on the Fed to raise rates but also signals that higher borrowing costs may already be weighing on economic activity.

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