US consumer inflation eases in June but may not relieve households or rule out Fed rate hikes

A modest drop in June CPI may mask rising fuel and food costs, leaving households under pressure and Fed policymakers debating the need for further rate hikes. U.S. consumer inflation is likely to ease in June, but this is unlikely to bring real relief to households or rule out a Fed rate hike this year, amid the unprecedented conflict in the Middle East. The expected softening of the Consumer Price Index (CPI) is largely tied to a retreat in gasoline prices after years of peaks, while such a temporary détente between the United States and Iran partially took hold last month. However, hostilities resumed last week after commercial Tankers were subjected to attacks in the Strait of Hormuz, leading to military strikes between the United States and Iran. Gasoline prices have moved higher again: the national average rose to $3.87 a gallon on Monday from $3.80 a week earlier, according to the American Automobile Association. Donald Trump stated on Monday that the U.S. would resume blocking Iranian shipments in the Strait of Hormuz, a key artery in global oil supplies. The pain level has declined from ten to nine, consumers are still feeling substantial pain. – Brian Bethune The Bureau of Labor Statistics is likely to release data on Tuesday: the CPI for June over the year could rise 3.8% from a year earlier, according to economists surveyed. Expectations range from 3.6% to 4.0%. In May, the CPI rose 4.2% year over year – the fastest increase since April 2023, economists say, and this is likely the peak. The U.S. Federal Reserve tracks the Personal Consumption Expenditures (PCE) price index for its 2% inflation target. Inflation was below 2% in early 2021. The mid-June Fed meeting minutes, released last week, show rising concerns about inflation among policymakers. The Fed left its policy rates unchanged in the range of 3.50%–3.75% at the June meeting, though new projections point to rising expectations of a rate hike in 2026. Stock markets price in roughly a 50.8% probability of a rate increase at the September FOMC meeting, according to the FedWatch tool. Economists expect the CPI in June to decrease by 0.1% month over month, which would be the first monthly decline since May 2020 after a 0.5% rise in May. Prices are still rising, and even with some stores attempting to cut prices to lure shoppers back, this is unlikely to lessen the overall bill due to other factors. – Diane Swonk The average price of fuel fell to $4.18 a gallon from $4.61 in May, the highest since July 2022. Despite some relief at the pumps, the anticipated rise in food prices could offset this effect after a modest uptick in May. Expected rise in food prices The war between the United States and Israel with Iran has pushed up prices for fertilizers and distribution costs, and droughts in parts of the United States could lead to higher food prices in the second half of the year and into 2027. Excluding the volatile components of food and energy, the CPI for June, by estimates, could rise 2.8% from a year earlier, after a 2.9% rise in May. The so-called core CPI could increase by 0.2% for the month, matching May’s gain. Some economists see the modest core CPI rise as a positive signal. While the renewed conflict between the United States and Iran lifted oil prices, they remain below the late-April and early-May peaks. The most important thing for Fed officials is core inflation, which does not directly respond to energy prices. – Andrew Hollenhorst Other economists offer more pessimistic assessments: modest core CPI readings point to sticky underlying inflation that keeps the question of rate hikes on the table this year. They also note high input costs and supplier bottlenecks, and producer price data emphasize expectations of further increases. In June, monthly core CPI rose, by estimates, due to higher prices for services, hotel services, and other costs associated with hosting the World Cup. A rebound in auto insurance costs is also expected after the decline in May – the longest such stretch since October 2020. Sharp increases are also expected in airfares and housing rents. Core inflation for goods may stay at the same level or rise slightly, while price increases for Apple products at the end of June are likely to show up in July. At the same time, tariff effects are expected to ease, but clothing may become more expensive, and household furniture could rebound after a dip. “Quotes about June CPI will not provide a clear answer as to whether the Fed will raise rates this year,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.