Biggest decline in consumer prices in America in over six years

Prices rose 3.5% annually in June, less than expected, as energy prices eased

America’s consumer price index fell a seasonally adjusted 0.4% for the month of June, bringing the annual inflation rate down to 3.5%. 

This represents the biggest decline in more than six years, as a sharp swoon in energy prices provided at least temporary relief from this year’s inflation surge, the US Bureau of Labor Statistics is reporting this morning. The consumer price index, a broad measure of costs for goods and services across the U.S. economy, was lower than expected across the board. 

The CPI fell a seasonally adjusted 0.4% for the month, bringing the annual inflation rate down to 3.5%%, following the 4.2% reading in May.  The monthly decline in headline inflation was the biggest since April 2020. Wall Street had expected a 0.2% monthly decline and 3.8% annual level. 

Core inflation was flat 

The monthly drop was the largest since April 2020, as core inflation, which excludes food and energy, was flat on the month, putting the 12-month rate at 2.6%. The consensus forecast was for respective increases of 0.2% and 2.9%. The easing of prices came from a big decline in energy and an easing in services costs, particularly for housing. 

The energy index slumped 5.7% in June, its biggest monthly drop since April 2020, though it still surged 15.7% on an annual basis, pushed by a 26.7% gain for gasoline. However, gasoline and fuel oil both saw decreases of more than 9% in June. In addition, service costs, which are closely watched by Federal Reserve policymakers for longer-run inflation trends, moderated significantly. 

Services excluding energy costs were flat, with shelter rising just 0.1% and transportation services posting a 0.3% decline. Food prices rose 0.2%, while new vehicles were flat and used cars and trucks saw a 0.2% decline. 

Apparel prices, which are sensitive to both energy and tariff inputs, fell 0.6%. Stock market futures were mostly positive following the report, while Treasury yields were sharply lower.

Likely Fed response

Traders continued to expect the Fed to hike in September, though they lowered the odds to 63% from better than 75% a day ago, according to the CME’s FedWatch measure of futures prices. The Fed currently targets its key overnight borrowing rate in a range between 3.5%-3.75%. 

Though the inflation readings offered some hope, they are unlikely to prompt the Federal Reserve to cut interest rates anytime soon, as the central bank is widely expected to raise its benchmark rate in September. Yesterday, Fed Governor Christopher Waller said that it would take several months of positive readings to convince him that inflation is moving back to the central bank’s 2% target.

The report follows tough talk from Fed officials about inflation. Following their June meeting, policymakers released a statement flatly saying the rate-setting Federal Open Market Committee “will deliver price stability.” New Fed Chairman Kevin Warsh, while previously expressing a belief that interest rates could be lowered in the future, has made controlling inflation a centrepiece of his message since taking office in May.

Easing inflation could be temporary, depending on how events unfold in the Middle East. A lessening of hostilities helped drive oil costs about 25% lower in June, but President Donald Trump last week declared a ceasefire with Iran over as the two sides exchanged attacks. Oil spiked on Monday and was higher again today.