Inflation Cools Broadly! US June CPI Rose 3.5% Year-on-Year, Far Below Expectations; Month-on-Month Decline for First Time in Six Years; Core CPI Growth Narrowed to 2.6%

US inflation has shown important signs of a turning point. June CPI recorded its first month-on-month decline in six years, while core inflation remained largely flat. The market subsequently significantly reduced bets on a Federal Reserve rate hike in July.

On Tuesday, data released by the US Bureau of Labor Statistics showed that the Consumer Price Index (CPI) rose 3.5% year-on-year in June, lower than the market expectation of 3.8% and marking a significant drop from the previous value of 4.2%. Core CPI rose 2.6% year-on-year, also below the expected 2.8% and the previous value of 2.9%.

In terms of month-on-month data, overall CPI fell by 0.4%, far exceeding the market expectation of -0.1%, while core CPI remained flat at 0%, a significant slowdown from the previous value of 0.2%. As the energy price shock triggered by the Iran war begins to recede, falling oil prices have provided some relief to consumers.

Following the data release, traders quickly lowered their bets on a Federal Reserve rate hike this month, indicating a clear shift in market judgment on the policy path. Meanwhile, in his testimony before Congress, Walsh stated that the Federal Reserve has "zero tolerance" for persistently high inflation.

Declining Energy Prices Are the Main Driver

The core driver behind the June CPI decline was the softening of energy prices.

Data shows that as the most intense phase of the energy shock from the Iran war gradually passed, gasoline prices fell significantly in June, directly leading to a negative month-on-month change in overall CPI. This marks the first monthly decline in US CPI since 2020, signaling a release of the earlier energy-driven inflationary pressure.

Decline in Core Goods Prices Supports Flat Core Inflation

The flat month-on-month reading for core CPI reflects a broad decline in goods prices. Specifically, prices for apparel and used cars both decreased, and motor vehicle insurance premiums also saw a significant drop. The weakness in these components collectively suppressed upward momentum in core inflation, easing market concerns about potential inflationary pressures.

Expectations for a July Fed Rate Hike Cool, but Risks Remain

The cooling of inflation data provides some policy room for the Federal Reserve's upcoming monetary policy meeting at the end of this month. Market bets on a July rate hike shrank significantly after the data release, US Treasury yields fell, and stock index futures strengthened, reflecting a rapid repricing of investor expectations for the monetary policy path.

However, uncertainty remains regarding whether inflation will continue to fall. There are signs of a new round of escalation in US-Iran tensions, posing a risk of oil prices rising again. If energy prices rebound, the previous momentum of inflation easing could reverse, adding new complexity to the Federal Reserve's policy assessment.

Market focus is now shifting to Walsh's statements during his congressional testimony to seek the latest signals from the Federal Reserve on the current inflation situation and policy direction.

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