US June CPI rises 3.5%, below forecasts, but Fed tightening and Middle East risks linger

A drop in global oil prices last month drove US consumer inflation lower than expected, official data showed.

The Bureau of Labor Statistics said Tuesday (local time) that the consumer price index rose 3.5 percent in June from a year earlier — a sharp slowdown from the 4.2 percent gain recorded in May and below the 3.8 percent consensus forecast compiled by Dow Jones.

On a monthly basis, the CPI fell 0.4 percent, also undershooting analyst expectations of a 0.2 percent decline. The month-over-month drop was the largest since April 2020, when prices fell 0.8 percent during the pandemic.

The easing stemmed largely from a rapid decline in global crude prices following the signing of a ceasefire MOU between the United States and Iran last month. Energy prices fell 5.7 percent from May, with gasoline prices tumbling 9.7 percent over the same period. However, energy prices remain 15.7 percent above year-earlier levels, a factor that continues to keep the overall annual inflation rate elevated.

Core CPI, which strips out food and energy, rose 2.6 percent from a year ago, down sharply from 2.9 percent in May. The core reading also came in below forecasts, which had called for a 2.9 percent annual gain and a 0.2 percent monthly increase. Used cars and trucks fell 0.2 percent from the prior month, apparel dropped 0.6 percent, and service prices excluding energy services were flat month-over-month — all contributing to the broader slowdown in consumer inflation.

While the softer-than-expected June CPI data eased some market concerns about inflation, tensions between the United States and Iran over the Strait of Hormuz could complicate the outlook. Washington deployed a maritime blockade against Iran that day, sending global oil prices up about 1.7 percent in a single session.

Federal Reserve Chair Kevin Warsh also signaled Tuesday that the central bank would not tolerate persistently high inflation. In remarks distributed ahead of his appearance before the House Financial Services Committee, Warsh said Fed officials share "an unwavering commitment not to tolerate persistently high inflation and to restore price stability," adding: "If we conduct monetary policy correctly — and we will — the inflationary surge of the past five years will become a thing of the past."

The Fed had already struck a hawkish tone earlier. Governor Christopher Waller said in a public speech Monday (local time) that if core inflation data released this week came in high again, "the FOMC should consider tightening monetary policy in the near term."

Waller also stressed that several more months of low readings would be needed before the Fed could conclude that inflation was moving in the right direction, signaling the central bank's intent to look past one-off factors.

Markets expect the Fed to hold its benchmark rate at the current 3.50–3.75 percent range at its monetary policy meeting July 28–29, with a 25-basis-point rate hike possible as early as September.

Meanwhile, the softer CPI print pushed bond yields lower. The yield on the policy-sensitive 2-year US Treasury note stood at 4.19 percent as of 9:15 a.m. Eastern time, according to electronic trading platform Tradeweb — down 0.07 percentage point from the previous session. The 10-year Treasury yield fell 0.03 percentage point to 4.58 percent at the same time, slipping back below the 4.6 percent threshold.