Consumer inflation in the U.S. turned out to be much lower than expected

Inflation in the U.S. slowed in June after a sharp acceleration from March through May. Consumer prices fell on a month-over-month basis for the first time in six years, while core inflation—which excludes food and energy—remained virtually unchanged. This has somewhat eased pressure on the Federal Reserve to raise interest rates, according to Bloomberg.

The U.S. Consumer Price Index (CPI) rose 3.5% year-over-year in June—following a 4.2% increase in May, according to data from the U.S. Bureau of Labor Statistics. The figures were much better than economists had expected. Wall Street had forecast a 3.8% increase, according to the Dow Jones consensus, CNBC reported.

Compared with the previous month, the CPI fell by 0.4%. This marks the first slowdown in consumer inflation since the coronavirus pandemic, according to Bloomberg.

The main reason was the sharpest drop in gasoline prices since 2022—nearly 10%. The core CPI index, which excludes energy and food costs, rose 2.6% year-over-year, while the market had expected 2.8–2.9%. The figure remained unchanged from May.

Futures on the S&P 500, a broad U.S. market index, rose 0.4%, while Nasdaq Composite futures jumped 1.4% right off the bat. Dow Jones futures pared their losses, which had been triggered by a plunge in IBM shares during premarket trading.

Ahead of the index release and amid the breakdown of the ceasefire in the Middle East, the yield on 10-year U.S. Treasury bonds—the main benchmark for government borrowing costs — rose by more than 1 basis point, to 4.6278%. The yield on 2-year Treasury notes, which are most sensitive to expectations regarding the Fed’s short-term policy, rose by more than 2 basis points to 4.29%. Following the release, bond prices rose sharply; in particular, the yield on 2-year bonds plummeted by 14 basis points to 4.14%. Investors scaled back their bets on a Fed rate hike in July, according to Bloomberg.

Traders were increasingly pricing in two rate hikes by April of next year, according to data from the CME’s FedWatch tool. The probability that such a decision would be made as early as the upcoming meeting on July 29, a few hours before the release of inflation data, stood at 39%. After the release, it fell to 16%.

At the same time, investors still believe that the Fed will raise rates in September, although the probability of this scenario has also declined—from 75% to 63%.

“This is unexpectedly weak data across virtually all components. The prospect of a rate hike in the near term is off the table (...) Our base case is that the Fed will keep rates unchanged,” Dan Carter, senior portfolio manager at Fort Washington Investment Advisors, told Bloomberg .

Despite the slowdown, annual inflation remains significantly above the Federal Reserve’s 2% target. Furthermore, although the effects of the energy shock caused by the war with Iran have begun to subside, the trend could quickly reverse if the current spike in oil prices—due to renewed tensions in the Strait of Hormuz—proves to be sustained, the agency warns.

“June finally brought some relief on the inflation front,” Heather Long, chief economist at Navy Federal Credit Union, told CNBC . “This takes some pressure off the Fed and allows it to adopt a wait-and-see approach. But the problem is that this relief may be short-lived if the war with Iran picks up steam again. For now, there’s too much uncertainty to know how the inflation story will ultimately play out.”

“We know that the market can withstand much higher oil prices, and U.S. stocks can continue to rise even as oil prices rise. The only thing that really matters is any indication that interest rates will rise,” Alpesh Patel, managing partner at RootBridge Capital, told Bloomberg.

Investors are now awaiting the first testimony by the new Fed Chair, Kevin Warsh, before the U.S. Congress, which is scheduled for later on Tuesday and will continue on Wednesday. As Ian Lingen, head of U.S. rate strategy at BMO Capital Markets, predicted, following the release of June inflation data and statements by the Fed chair, market confidence in a July rate hike will decline. However, Warsh’s reluctance to give direct signals about future policy may limit the extent of this reassessment. In a statement released ahead of the meeting, the Fed chair emphasized that the central bank is “intolerant” of elevated inflation.

This article was AI-translated and verified by a human editor