US inflation cools to 3.5% in June as Iran tensions threaten rebound

The consumer price index rose 3.5% in June from a year earlier, the first decline in the annual rate since January, as a plunge in gasoline prices offset persistent food and shelter costs.

"The worst is over, we're past the peak and inflation should moderate," said Mark Zandi, chief economist at Moody's. "The biggest threat is that things unravel and we're back to full-blown war with the Strait shut down."

The CPI fell 0.4% on a monthly basis, the largest decline since April 2020 and well below the 0.1% dip economists had forecast. Energy prices tumbled 5.7%, with gasoline dropping 9.7% as the US-Iran ceasefire took hold in mid-June. Core inflation, which excludes food and energy, rose 2.6% year-over-year, down from 2.9% in May, and was unchanged month-over-month. Shelter costs posted their smallest monthly gain since January 2021 at 0.1%, while apparel fell 0.6% and motor vehicle insurance dropped 2%.

The reprieve may prove short-lived. The ceasefire collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering renewed US-Iran military strikes. The national average gasoline price has already climbed to $3.86 a gallon as of Tuesday from $3.79 a week ago, with oil prices rising to a four-week high above $86 a barrel. Financial markets now price roughly a 60% chance of a Federal Reserve rate hike in September.

The June CPI report offered the first meaningful relief after three months of accelerating inflation that pushed the annual rate to 4.2% in May, its highest since April 2023. The pullback was concentrated in energy, but there were signs of broader cooling. Used car and truck prices declined 0.2%, medical services eased 0.1%, and communication prices fell 1.5%. Food prices continued to climb, rising 0.2% on the month and 3% year-over-year, with eggs jumping 4.3% and dairy products up 1.2%.

The Fragile Ceasefire Dividend

The ceasefire between the US and Iran, reached June 17, sent crude oil prices from above $90 a barrel to roughly $73 by the end of the month — a decline of nearly 20%. That directly fed into the 9.7% drop in gasoline prices that accounted for most of the CPI moderation. But the agreement began fracturing in early July, and by Tuesday the adversaries had exchanged hostilities for a third consecutive day. Brent crude has rebounded to around $86 a barrel, and Goldman Sachs Research warned Sunday that "a serious re-escalation of the conflict would threaten to revive the key upside risk to inflation and raise the odds of rate hikes."

Fed Chair Kevin Warsh, testifying before Congress on Tuesday, said the central bank had "no tolerance for persistently elevated inflation" and did not signal that the June CPI data had changed the outlook. Minutes of the Fed's June 16-17 meeting, published last week, showed policymakers' concerns about inflation mounted even before the ceasefire unraveled. The Fed's benchmark rate stands at 3.50%-3.75%, where it has remained since the last cut.

What Comes Next

For lower-income households, the cumulative toll remains severe. Numerator data show prices for everyday goods have risen 35.7% for low-income consumers and 39.4% for Gen Z since January 2018, compared with a national average of 33.8%. "Inflation continues to place the greatest strain on lower-income households," said Paul Stanley, senior economist at Numerator. "With geopolitical tensions continuing to create uncertainty around future price pressures, that gap is unlikely to narrow."

The June CPI data will feed into the Fed's preferred inflation gauge, the Personal Consumption Expenditures price index, due later this month. Economists estimate core PCE inflation rose 3.3% year-over-year in June, down from 3.4% in May. The July CPI report, due Aug. 13, will be the first to capture the full impact of renewed US-Iran hostilities — and may determine whether the Fed's next move is a cut or a hike.

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