By Lucia Mutikani
WASHINGTON, July 14 (Reuters) – U.S. consumer inflation slowed more than expected in June as energy prices retreated, but the moderation was insufficient to convince financial markets to take an interest rate increase from the Federal Reserve this year off the table against the backdrop of renewed conflict in the Middle East.
The report from the Labor Department on Tuesday, which also showed underlying inflation subsiding last month, gave officials at the U.S. central bank some breathing room when they meet later this month, economists said. They, however, cautioned that June’s Consumer Price Index data had been overtaken by the recent escalation in hostilities between the U.S. and Iran.
Fed Chair Kevin Warsh told lawmakers on Tuesday the central bank had “no tolerance for persistently elevated inflation,” and he did not think that everything was swell after the CPI report.
“Energy prices plunged on the Iran cease-fire and memorandum of understanding,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “But with fighting back on in the Gulf, the MOU in tatters, and energy prices heading higher again in July, the balance of risks remains more heavily weighted toward a rate hike at some point this year.”
The CPI increased by a still-high 3.5% in the 12 months through June after surging 4.2% in May, which was the largest year-on-year rise since April 2023, data from the Labor Department’s Bureau of Labor Statistics showed.
The CPI fell 0.4% over the month, the first decline since April 2020, after advancing 0.5% in May. Economists polled by Reuters had forecast the CPI rising 3.8% year-on-year and dipping 0.1% on a monthly basis.
The pullback in the CPI mostly reflected a 5.7% drop in energy prices, the largest monthly decline since April 2020, after rising 3.9% in May as the truce took hold. Gasoline prices tumbled 9.7%, but advanced 26.7% year-on-year in June. The ceasefire collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran.
Gasoline prices have been climbing, with the national average rising to $3.86 a gallon on Tuesday from $3.79 a week ago, data from motorist advocacy group AAA showed. Further increases are likely as oil prices rose to a four-week high on Tuesday after Washington reimposed a naval blockade of Iran.
“The outlook for inflation in July is less promising,” said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank.
Food prices rose 0.2%, matching May’s gain. They advanced 3.0% year-on-year in June. Grocery prices climbed 0.2%, lifted by a 4.3% jump in the cost of eggs and a 1.2% increase in dairy products. But prices for nonalcoholic beverages fell 1.5%, with coffee declining 2.0%. Fruits and vegetables were 0.2% cheaper. They, however, increased 5.3% year-on-year.
Excluding the volatile food and energy components, the CPI increased 2.6% year-on-year after rising 2.9% in May. The so-called core CPI inflation was unchanged over the month, after gaining 0.2% in May. The Fed tracks the Personal Consumption Expenditures Price Indexes for its 2% inflation target.
Financial markets expected the Fed to keep its benchmark overnight interest rate unchanged in the 3.50%-3.75% range this month. Traders, however, saw a roughly 60% chance of a rate hike in September. Inflation was last below 2% in early 2021. Minutes of the Fed’s June 16-17 meeting published last week showed policymakers’ concerns about inflation mounted last month.
Stocks on Wall Street were trading higher. The dollar eased against a basket of currencies. U.S. Treasury yields fell.
TARIFF PASS-THROUGH APPEARS TO BE OVER
Core inflation was restrained by a 2.0% drop in motor vehicle insurance, which followed a 1.7% decline in May.
Communication prices decreased 1.5% over the month, while the cost of shelter rose 0.1%, the smallest monthly gain since January 2021. Owner’s equivalent rent increased 0.2%, and prices for hotel and motel rooms dropped 2.3%, likely as the boost from the FIFA World Cup faded. The cost of healthcare eased 0.1%, with health insurance declining 0.5%.
But the cost of recreation increased 0.5%, and airline fares rose 0.2%. The overall cost of services was unchanged in June.
Core goods prices dipped 0.1% for a second straight month, amid a 0.6% decline in the cost of apparel, which suggested the pass-through from tariffs could be over. Prices for used cars and trucks dropped 0.2%, while prescription medication fell 0.1%. Tobacco and smoking product prices slipped 0.7%, the biggest drop since July 2014.
But prices for household furnishings and operations rose 0.2%. Some economists viewed the decreases in motor vehicle insurance, tobacco products and healthcare as a fluke.
“There are a number of one-offs, but also several intriguingly soft readings that could signal meaningful cooling,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. “I am highly skeptical that inflation has just rolled over.”
Based on the CPI data, economists estimated that core PCE inflation increased 3.3% year-on-year in June after advancing 3.4% in May. It was forecast rising 0.2% over the month after climbing 0.3% in May. The estimates could change after June’s Producer Price Index report on Wednesday.
June’s PCE inflation data would still be based on the old methodology for portfolio management and investment advice services, legal services, and computer software and accessories, which will be changed with the annual revisions in September.
“For the Fed, this is a relief, but not enough to put it at ease,” said Carl Weinberg, chief economist at High Frequency Economics. “We predict prices will accelerate again in the next few reports as energy and fuel prices rise again, and as their increases ‘bleed’ into core prices via transportation costs.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
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