The Bureau of Labor Statistics reported Tuesday morning that the Consumer Price Index fell 0.4% in June on a monthly basis and rose 3.5% year-over-year, a larger-than-anticipated decline that came in below the Dow Jones consensus estimate of 3.8% annual inflation and reversed course sharply from May's 4.2% reading, which had been the highest in three years. The monthly decline was the steepest since April 2020.
More consequentially for Federal Reserve policy, the core CPI — which strips out volatile food and energy prices and serves as the central bank's preferred short-run inflation signal — posted a flat monthly reading and rose just 2.6% on an annual basis, a meaningful deceleration from May's 2.9% and below the 2.8% consensus estimate. The improvement in core was driven partly by a pullback in shelter costs, which account for roughly one-third of the index's total weighting and had been the most persistent source of above-target inflation throughout the current cycle.
The primary driver of the soft headline was a sharp drop in energy prices during June, when gasoline prices fell sharply following the brief mid-June ceasefire between the United States and Iran and the temporary reopening of the Strait of Hormuz. That energy effect has since partially reversed: Trump's decision to reinstate the Hormuz blockade on Monday sent oil prices surging 9.4%, a development that will not appear in the June data but will be a significant headwind for the July CPI reading due in mid-August.
Markets reacted swiftly. CME FedWatch data showed the probability of a 25 basis point rate hike at the Fed's July 28-29 meeting falling from 42% before the release to roughly 17% immediately after. The 10-year Treasury yield fell 6 basis points to 4.553% and the 2-year yield dropped 8 basis points to 4.181%, reflecting a broad repricing of the near-term rate path. The US dollar index fell approximately 0.6%.
The inflation print is the last major economic data release before the July FOMC meeting and lands on the same morning as Fed Chair Kevin Warsh's semi-annual testimony before the House Financial Services Committee, in which prepared remarks released ahead of the session promise to make inflation "a thing of the past." Warsh's inaugural Congressional testimony will be closely watched for any forward guidance on whether the cooler June reading changes the committee's assessment of the rate path.
Economists cautioned against reading too much into a single month of improvement. BMO Capital Markets noted in a client note that the core trend remains "stubbornly firm," and that one month of softer data driven largely by an energy swing does not resolve the Fed's underlying dilemma — particularly given that re-escalation of the Iran conflict will likely push energy prices sharply higher in July data. One-year-ahead inflation expectations, measured by the New York Fed's June survey, climbed to 3.7%, the highest since September 2023, complicating any narrative that consumer price pressures are durably easing.
Despite the caveats, the report gives the Fed cover to hold rates at 3.50% to 3.75% at its July meeting without appearing to capitulate on inflation, reducing near-term volatility risk for equity markets even as the oil price trajectory threatens to reverse the June improvement in coming months. Nasdaq 100 futures edged higher following the print even as Dow futures remained slightly negative, reflecting the report's asymmetric benefit to duration-sensitive growth names relative to financials.