U.S. Inflation Slows in June Amid Gasoline Price Drop

U.S. consumer inflation slowed more than expected in June, easing market anxieties about potential Federal Reserve rate hikes. The Consumer Price Index (CPI) increased by 3.5% year-on-year, down from a surge of 4.2% in May, according to data from the Labor Department's Bureau of Labor Statistics.

The CPI fell 0.4% over the month, driven primarily by a decline in gasoline prices due to a fragile ceasefire between the U.S. and Iran. Economists polled by Reuters had forecasted a 3.8% year-on-year rise and a 0.1% monthly dip.

Excluding volatile food and energy components, core CPI increased 2.6% annually, down from 2.9% in May, and remained unchanged over the month.

The report comes as Fed Chair Kevin Warsh discusses monetary policy with Congress. U.S. stocks opened mostly higher, with the S&P 500 up 0.2% and the Nasdaq up 1%. Treasury prices rose, sending yields lower, with the 2-year yield down 7 basis points at 4.191% and the 10-year yield down 3 basis points at 4.575%. The dollar fell 0.6% to 100.7.

Jamie Cox, Managing Partner at Harris Financial Group, noted that while consumption remains high, the long-awaited deflationary component of AI is starting to show up, which could surprise many in the coming quarters. He also mentioned that expectations for a July rate hike have been pushed back due to the cooler-than-expected CPI data.

Wholesale prices unexpectedly fell in June as sliding energy costs helped brighten the inflation picture, according to the Bureau of Labor Statistics. The Producer Price Index (PPI) posted a seasonally adjusted 0.3% decline for the month, compared with the Dow Jones consensus estimate for no change. On an annual basis, the index indicated a 5.5% inflation rate.

Excluding food and energy, the core PPI rose 0.2%, against the outlook for a 0.3% increase. The core PPI less trade services rose 0.1% and was up 5.1% from a year ago. Goods prices posted a 1.4% monthly decline, the biggest drop since July 2022 as energy slumped 6.4%. Within the goods category, gasoline tumbled 12%, accounting for about two-thirds of the monthly decrease.

The cost of goods brought into the U.S. posted an unexpected increase in June as the price of goods from China rose by their largest monthly level in more than 18 years, according to a report from CNBC citing data from the Bureau of Labor Statistics. Import prices were up 0.3% for the month, with a drop in energy being offset by increases elsewhere. On an annual basis, prices jumped 7.1%, the biggest move higher since August 2022.

The report indicated that the artificial intelligence build-out could be hitting prices, as costs rose for computers, peripherals and semiconductors. China played a significant role, with import prices rising 0.9%, the biggest monthly move since January 2008. The 12-month increase was 1.3%, the largest yearly gain since November 2021 to November 2022.

Despite the positive data, experts caution that the relief may be short-lived as tensions between the U.S. and Iran have escalated again, potentially driving oil prices back up. The ceasefire collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran.

Financial markets expected the Federal Reserve to keep its benchmark overnight interest rate unchanged this month but continued to see a rate hike in September. Fed Chair Kevin Warsh told lawmakers that the central bank had 'no tolerance for persistently elevated inflation.'