US CPI falls 0.4% in June, cooling Fed rate hike bets

Softer-than-expected June inflation data pulled the rug from under growing expectations for a Federal Reserve rate hike this month.

The consumer price index fell 0.4% in June, the biggest monthly decline since April 2020, as a 9.7% drop in gasoline prices drove the headline figure well below the 0.1% decline economists had forecast.

"If you were looking for runaway inflation in this report, you didn't get it," Jamie Cox, managing partner at Harris Financial Group, said. "It's pretty clear any recent rise in inflation was related to energy prices and wouldn't be long-lasting."

Core CPI, which strips out volatile food and energy costs, was flat month over month against expectations for a 0.2% increase and rose 2.6% from a year earlier, down from 2.9% in May and below the 2.8% consensus. The annual headline rate slowed to 3.5% from 4.2% in May, undershooting the 3.8% median estimate. TD Securities had forecast a 0.22% monthly decline in headline CPI, led by a 10% drop in gasoline prices.

The data likely derails what had been a rapid repricing of Fed tightening. Traders had pushed the probability of a quarter-point rate hike at the July 28-29 meeting to 42% as recently as Monday, after Fed Governor Chris Waller signaled he would back an immediate increase if core CPI failed to moderate. That probability collapsed to 17% after the release, according to the CME FedWatch tool.

The relief may prove temporary. The ceasefire between the US and Iran that drove gasoline prices lower in June collapsed this week, with US Central Command launching fresh strikes against Iranian assets in the Strait of Hormuz. West Texas Intermediate crude rose 2.1% to $79.80 a barrel Tuesday, while Brent crude gained 2.4% to $85.35, threatening to push pump prices back up in the months ahead.

The cross-asset reaction was swift. The US dollar index fell 0.3% to 100.92, its lowest level in weeks, while the 10-year Treasury yield dropped as much as 5 basis points to 4.56% before settling at 4.58%, down 4 bps on the day. The two-year yield, more sensitive to Fed policy expectations, slid 7 bps to 4.19%. EUR/USD stabilized above 1.1400 after touching a 12-month low below 1.1330 in late June, though the pair's relative strength index remained below 50, reflecting buyers' hesitancy. Gold futures climbed 1.3% to $4,055 an ounce, though the metal's technical positioning remains fragile after failing to hold above its 50-day moving average in recent weeks. The S&P 500 gained 0.4%, the Nasdaq Composite added 0.9%, and the Dow Jones Industrial Average was little changed.

The last time the monthly CPI posted a decline of this magnitude was at the onset of the pandemic in April 2020, when lockdowns crushed demand. The June reading was driven not by collapsing demand but by a temporary geopolitical truce that has already unraveled. The previous month's 0.5% increase in May had marked the highest annual reading since May 2023, stoking fears that inflation was reaccelerating.

Fed Chair Kevin Warsh began two days of testimony before the House Financial Services Committee on Tuesday, vowing to make inflation "a thing of the past." The June CPI data gives him cover to maintain a patient stance, though the renewed oil price spike and the inflationary effects of the artificial intelligence investment boom keep the risk of further tightening alive. The Fed has flagged that the "Computer Software and Accessories" category of the PCE price index rose at a 73% annualized rate from November through March, a record pace driven by AI-related demand for hardware and software subscriptions.

Markets now price about a 77% chance that the Fed raises rates at least once by year-end, down from near-certainty before the CPI print but still reflecting lingering inflation anxiety. The next test for the policy path comes Thursday with the release of the producer price index, followed by Fed Chair Warsh's second day of testimony Wednesday.

This article is for informational purposes only and does not constitute investment advice.