The Consumer Price Index fell a seasonally adjusted 0.4% in June, the Bureau of Labor Statistics reported Tuesday, pushing the annual inflation rate down to 3.5%. That monthly drop was the largest since April 2020, and it came in well below what economists had predicted.
According to CNBC, economists surveyed by Dow Jones had expected a monthly drop of 0.2% and an annual rate of 3.8%, following a 4.2% reading in May. The June numbers beat expectations on every measure.
Energy was the main driver. The energy index slumped 5.7% for the month, its steepest monthly decline since April 2020. Gasoline and fuel oil both fell more than 9% in June. Even so, energy prices remain 15.7% higher than a year ago, with gasoline still up 26.7% on an annual basis.
Core inflation, which strips out food and energy, came in flat for the month, putting the 12-month rate at 2.6%. Forecasters had expected a 0.2% monthly gain and a 2.9% annual rate. Services costs, which the Federal Reserve watches closely for longer-term inflation trends, also moderated. Services excluding energy were flat, shelter rose just 0.1%, and transportation services fell 0.3%.
Food prices rose 0.2%. New vehicle prices were flat, and used cars and trucks fell 0.2%. Apparel, which is sensitive to both energy costs and tariffs, dropped 0.6%.
Stock market futures moved mostly higher after the report and Treasury yields fell sharply. Traders still expect the Fed to raise rates in September, though the probability dropped to 63% from more than 75% the day before, according to the CME's FedWatch measure of futures prices. The Fed currently holds its key overnight borrowing rate in a range of 3.5% to 3.75%.
"June finally brought some relief on inflation," said Heather Long, chief economist at Navy Federal Credit Union. "This takes the pressure off the Federal Reserve and allows the central bank to wait and see what happens. The concern is that this relief will be short-lived as the war in Iran re-starts. It's too uncertain to know how the inflation story ends."
Despite the better-than-expected numbers, Fed officials have given little indication they are ready to pull back. Fed Governor Christopher Waller said Monday that it would take several months of positive readings to convince him inflation is moving back toward the central bank's 2% target. Following their June meeting, policymakers released a statement saying the rate-setting Federal Open Market Committee "will deliver price stability."