Consumer prices fell in June due to lower energy and fuel prices, a reversal after rising sharply in recent months due to the Iran war. However, inflation risks will resume in the coming months amid renewed tensions between the US and Iran, economists said.
The consumer price index, an inflation barometer, rose 3.5% in June from 12 months earlier, the Bureau of Labor Statistics said Tuesday.
That was down from 4.2% in May – the first drop in annual inflation since January, when it stood at 2.4%.
“It suggests that the worst is over, we’re past the peak and inflation should come down,” said Mark Zandi, chief economist at Moody’s.
“The most dangerous thing is that things go wrong and we return to a full-scale war with the Strait [of Hormuz] shut up,” he said.
That could raise interest rates. The rate of inflation is one of the economic indicators that the Federal Reserve uses to guide interest rate decisions. Ahead of this latest CPI reading, policymakers at the US central bank recently signaled that an increase in borrowing costs could be on the table to try to contain inflation. The Fed is targeting annual inflation at around 2% over the long term.
Barring renewed tensions, economists said inflation should moderate, potentially preventing the Fed from raising borrowing costs.
“We think inflation will continue to slow down next year,” said Tom Porcelli, chief economist at Wells Fargo. “We don’t see a compelling reason at this point for the Fed to raise rates.”
US-Iran escalation could cause inflation
The US and Iran reached a ceasefire agreement in mid-June to try to end the conflict that erupted in Feb. 28, when the US and Israel bombed Iran.
World oil prices fell sharply in mid-June, from more than $90 per barrel to around $73 per barrel by the end of the month.
Prices of gasoline, refined from crude oil, and other fuels and energy products have fallen sharply as a result.
Gasoline prices fell nearly 10% in June while fuel oil fell 9% and the energy sector fell 6%, according to inflation data released on Tuesday. However, each rose by double digits last year: By 27%, 43% and 16%, respectively.
Since energy and fuel are big expenses for businesses — fuel to power airplanes and transport food to grocery stores, for example — consumers have seen prices rise to varying degrees elsewhere, too.
The price recovery in June may be short-lived amid simmering conflicts in the Middle East.
That US-Iran deal appears to be increasingly fraying after the adversaries traded blows for three days in a row on Tuesday. Global oil prices rose to $86 a barrel as of 9:45 a.m. ET Tuesday.
“A renewed escalation of the conflict could threaten to revive inflationary risks and raise the rate of inflation,” Goldman Sachs Research wrote in a paper on Sunday.
The biggest one-month drop since April 2020
Overall, the consumer price index fell 0.4% on a monthly basis in June — the largest single-month decline since April 2020, the start of the Covid-19 pandemic, the BLS said.
The energy index was a major contributor to that decline, “more than offsetting” increases in other indicators such as housing and food, the BLS said.
But there were declines in other areas, too.
The price of new cars remained stable during the month. Prices for used cars and trucks fell 0.2% in June, bringing the annual decline to about 2%, likely due to weaker consumer demand amid auto concerns, Zandi said.
The price of clothing and electricity also fell “a lot” during the month, while the price of health services also fell and houses “barely increased,” said Zandi.
However, he does not expect all these conditions to continue, and he included price weakness in the data “confounding factors” that may occur in CPI reports from time to time.
Of course, certain categories within the broad CPI report can go up or down amid various supply and demand issues.
For example, roast beef prices have risen nearly 14% in the past year amid decades of low cattle supply. Taxes and bad weather also pushed up tomato prices by 20% last year, although they have recently started to fall.
In the end, “there is a lot of gravity at work to push inflation back to the target – assuming the war never goes away,” Zandi said.
