U.S. CPI falls to 3.5% in June as brief Iran ceasefire cools energy costs; oil rally threatens fresh inflation spike

Energy-driven cooldown

The Labor Department reported that the consumer price index fell 0.4% in June from May, the first monthly decline since 2020, after a 0.5% increase in May. Annual inflation dropped to 3.5% from 4.2% in May, a three-year high. The CPI for energy sank 5.7% after climbing 3.9% in May, with gasoline prices plunging 9.7% month-on-month, the main driver. Excluding volatile food and energy, core CPI rose 2.6% year-on-year, down from 2.9% in May, and was unchanged month-on-month. The national average for a gallon of regular gas at end-June was 71 cents below the May peak, according to AAA.

The Iran factor and the Strait of Hormuz

The ceasefire that delivered that reprieve collapsed in early July after commercial tankers came under fire, triggering renewed U.S. military action and reinstatement of a blockade of Iranian ports. President Trump announced a 20% toll on all cargo passing through the Strait of Hormuz, through which about 20% of the world’s crude oil normally transits. Brent crude, the global benchmark, rose from a recent low of $67 per barrel earlier in July to $80 by Monday and reached $86.53 on Tuesday, up more than 20% since July 1. A separate supply shock is building in Russia, where the war against Ukraine has caused a fuel shortage.

We’re probably maybe a week away from seeing the national average again hitting $4.00. The CPI party from June it’s going to be crashed here I think for the month of July.

It’s a double whammy with little cushion.

Underlying pressures and Waller’s warning

Food prices rose 0.2% in June, while housing and other services continued to climb, keeping core inflation above the Fed’s 2% target. Fed Governor Christopher Waller had cautioned on Monday that rates may need to rise in the “near term” if core CPI stayed hot, though the June figure of 2.6% could ease that urgency. Analysts at Capital Economics wrote that the AI investment boom and rebounding consumer demand will keep core inflation above target, making hikes a matter of “when, rather than if.” The June CPI surprised well below the consensus forecast of 3.8% year-on-year, but the relief may prove fleeting as energy costs re-accelerate.

Fed Chair Warsh on Capitol Hill

New Federal Reserve Chair Kevin Warsh began two days of testimony on Tuesday, appearing before the House Financial Services Committee and set to repeat the exercise Wednesday before the Senate Banking Committee. In prepared remarks, he vowed the central bank would erase what he called the “inflation surge of the last five years.”

The Fed’s number one objective is to get monetary policy right – or as near to it as we possibly can. If we get policy right – and we will – the inflation surge of the last five years will be a thing of the past.

He stressed the Fed has “no tolerance” for persistently elevated inflation, though the June data offered a breather.

Markets slash rate hike odds

In the wake of the CPI release, U.S. stocks opened higher: the S&P 500 added 0.2% and the Nasdaq gained 1%. Treasury yields fell, with the 2-year note dropping 7 basis points to 4.191% and the 10-year yield slipping 3 basis points to 4.575%. The dollar weakened 0.6% to 100.7. Traders now price only a 10% chance of a quarter-point rate increase at the Fed’s July 28‑29 meeting, down from 35% before the data. Core inflation’s flat reading and a falling headline cooled immediate tightening fears, but the risk of sustained energy-driven price pressures lingers beyond the summer.