Consumer prices fell to their lowest level in more than six years in June as a sharp drop in energy prices provided at least temporary relief from rising inflation this year, the Bureau of Labor Statistics reported Tuesday.
The consumer price index, a broad measure of the cost of goods and services across the US economy, was lower than expected across the board. The CPI fell by a seasonally adjusted 0.4% in the month, bringing the annual inflation rate down to 3.5%.
Economists polled by Dow Jones were looking for a 0.2% decline and an inflation rate of 3.8%, following a reading of 4.2% in May. Monthly inflation was the highest since April 2020.
Inflation, which excludes food and energy, was the lowest for the month, putting the 12-month rate at 2.6%. The consensus forecast was for increases of 0.2% and 2.9% respectively, following May’s 2.9% rate.
The energy index fell 5.7% in June, its biggest monthly drop since April 2020, although it was still up 15.7% on the year, pushed by a 26.7% fuel gain. However, gasoline and fuel oil both fell by more than 9 percent in June.
Additionally, the cost of services, which is closely watched by Federal Reserve policymakers for long-term inflationary trends, is very limited. Services excluding electricity costs were lower, with shelter up 0.1% and transport services down 0.3%.
Food prices rose 0.2%, while new and used cars and trucks fell 0.2%. Commodity prices, which are sensitive to both energy and income tax, fell 0.6%.
Stock market futures were very positive following the report while Treasury yields were very low. Traders continued to expect the Fed to hike in September, though they lowered the odds to 63% from a better than 75% the previous day, according to CME’s FedWatch estimate of future rates.
The Fed currently targets its key overnight lending rate in a range between 3.5%-3.75%.
“June finally brought some relief to inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “This takes pressure off the Federal Reserve and allows the central bank to wait and see what happens. The concern is that this relief will be short-lived as the war in Iran resumes. It is very uncertain to know how the inflation story ends.”
While the inflation figures offered some hope, they are unlikely to encourage Federal Reserve officials to cut interest rates anytime soon, as the central bank is expected to raise its benchmark rate in September. Fed Governor Christopher Waller said on Monday that it will take several months of positive readings to believe that inflation is returning to the central bank’s 2% target.
The report follows tough talk from Fed officials about inflation. After their June meeting, policymakers issued a statement saying the Federal Open Market Committee’s rate setting “will bring about price stability.”
New Fed Chairman Kevin Warsh, while previously expressing a belief that interest rates may be lowered in the future, has made controlling inflation central to his message since taking office in May.
“The Fed’s first objective is to get monetary policy right — or as close to it as possible.” Warsh said in his remarks to Congress that it will be delivered on Tuesday. “That is our clear and continuous goal, the star we are guiding towards. And if we adjust the policy – and we will – the inflation of the last five years will be a thing of the past.”
The reduction in inflation may be temporary depending on how things go in the Middle East.
The reduction in adversaries helped reduce the cost of oil by about 25% in June, but President Donald Trump last week announced a ceasefire with Iran as the two sides traded attacks. Oil rallied on Monday and was higher again on Tuesday.
“The longer the dispute drags on, the more likely it is that the Fed will have to step up and go back on its promise from Warsh’s first meeting as Chairman to ‘provide price stability,'” said Ryan Weldon, director of investment at IFM Investors.
