Inflation Cools in June Report, But One CU Economist Says There’s One Reason–And it Could Change

WASHINGTON — U.S. consumer inflation cooled more than expected in June, offering relief after several months of elevated price pressures, though economists cautioned the improvement could prove temporary as renewed geopolitical tensions threaten to push energy prices higher.

The Consumer Price Index fell 0.4% in June on a seasonally adjusted basis, the largest monthly decline since April 2020, after rising 0.5% in May, according to data released Tuesday by the Bureau of Labor Statistics. Compared with a year earlier, consumer prices rose 3.5%, down from 4.2% in May. 

Foot off the Gas

Dawit Kebede

“Falling gas prices led June’s decline and pulled headline inflation lower year-over-year. Renewed hostilities could complicate the energy picture ahead, and a reversal in gasoline costs would be the most likely channel for that pressure to show up,” said America’s Credit Unions Senior Economist Dawit Kebede. “But softening core prices point to broader-based moderation, suggesting the easing isn’t confined to energy alone. That’s welcome news for a Federal Reserve that has kept its focus on price stability.”

Excluding the volatile food and energy categories, the core CPI was unchanged from May and increased 2.6% over the previous 12 months, suggesting underlying inflation pressures also eased. The annual core inflation rate declined from 2.9% in May. 

The BLS said a 5.7% decline in energy prices, led by sharply lower gasoline prices, accounted for much of the monthly drop. Prices also fell for used vehicles, apparel, medical care and motor vehicle insurance, while shelter costs continued to rise but at a slower pace. Food prices posted a modest increase. 

Below Economists’ Expectations

The report came in below economists’ expectations. According to The Wall Street Journal, many analysts had expected annual inflation to remain closer to 3.8%, while Reuters reported forecasts ranging from 3.6% to 4.0%. 

Financial markets welcomed the report. Reuters reported Treasury yields fell, the dollar weakened and investors reduced expectations that the Federal Reserve would raise interest rates in the near term. 

Even so, economists urged caution in interpreting a single month’s data. The Wall Street Journal reported that the June slowdown was driven largely by lower gasoline prices following a temporary ceasefire involving Iran, while Reuters noted that renewed conflict in the Middle East has already pushed oil prices higher again, raising the possibility that inflation could accelerate in coming months.