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

Inflation data for June showed a easing of price pressures following a sharp acceleration from March through May. 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 core CPI, which excludes volatile energy and food prices, rose 2.6% year-over-year, while the market had expected a rise of 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 pre-market plunge in IBM shares.

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%.

Since the beginning of the month, yields on two-year securities have risen by about 10 basis points, and yields on 10-year securities by 15 basis points, completely erasing the year-to-date return on the Bloomberg Treasury Bond Index.

Expectations of tighter monetary policy were growing in the market, according to CNBC. Following a sharp rise in oil prices, 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—just a few hours before the release of inflation data—stood at 39%. After the release, it fell to 16%.

Despite the slowdown, annual inflation remains well above the Fed’s 2% target. Furthermore, this trend could quickly reverse if the current spike in oil prices—triggered by renewed tensions in the Strait of Hormuz—proves to be sustained, Bloomberg warns.

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

“The market is already seriously considering a rate hike in July,” said Ed Al-Hussein, a portfolio manager at Columbia Threadneedle, even before the inflation report was released. He estimated the probability of such a move at more than 50%. “We’ll need a bit of luck for inflation to return to the 2% target,” he said.

The market is also 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 somewhat. However, Warsh’s reluctance to give direct signals about future policy may limit the extent of this reassessment.

This news story is being updated.

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