U.S. CPI drops 0.4% in June, annual inflation eases to 3.5%

The U.S. Bureau of Labor Statistics said the consumer price index declined 0.4% in June, lowering the annual inflation rate to 3.5%, below economists' expectations of a 0.2% drop and a 3.8% year-over-year rate. The monthly decline was the largest since April 2020. Core CPI, which excludes food and energy, was flat, keeping the 12-month rate at 2.6%, short of the 2.9% forecast. Energy prices fell 5.7% for the month, their steepest drop since 2020, though they remain 15.7% higher than a year earlier, driven by a 26.7% rise in gasoline prices; gasoline and fuel oil each fell more than 9% in June. Services costs moderated, with shelter up 0.1% and transportation services down 0.3%. Food prices rose 0.2%, new vehicles were unchanged, and used cars and trucks declined 0.2%; apparel prices fell 0.6%.

"June finally brought some relief on inflation," said Heather Long, chief economist at Navy Federal Credit Union. "This takes the pressure off the Federal Reserve and allows the central bank to wait and see what happens." "The longer the conflict drags on, the higher the probability that the Fed will have to hike," said Ryan Weldon, investment director at IFM Investors. Federal Reserve officials are still expected to raise the benchmark rate in September, with Governor Christopher Waller noting that several months of positive data would be needed to consider inflation moving toward the 2% target. Chairman Kevin Warsh reiterated that achieving price stability remains the Fed's primary goal. Market reactions included modest gains in stock-index futures and a decline in Treasury yields, while expectations for a September rate hike fell to 63% from over 75% a day earlier.