US inflation cools to 3.5% in June

U.S. consumer prices declined markedly in June, with the consumer price index (CPI) falling 0.4% on a seasonally adjusted basis. This was the largest monthly drop since April 2020 and brought the annual inflation rate down to 3.5%. Both figures came in cooler than economists had forecast, as pre-release surveys had pointed to a 0.2% monthly decline and a 3.8% year-over-year rate.

The June figures indicate that price pressures eased more quickly than anticipated at the start of the summer. The combination of a negative monthly reading and a slower annual pace suggests that earlier inflation momentum has moderated, at least temporarily, in key segments of the economy.

A sharp drop in energy prices was a major contributor to the overall decline in the CPI, providing notable relief to headline inflation. Lower energy costs helped offset increases in other categories and were central to the negative monthly reading.

Beyond energy, price changes were more nuanced. Food prices increased 0.2% in June, showing continued but modest upward movement. New vehicle prices were flat, while used cars and trucks recorded a 0.2% decline, pointing to some easing in goods-related inflation.

Services prices, a key area of focus for policymakers, showed signs of moderation during the month. Services excluding energy were flat in June, indicating a pause in broader services inflation. Within that category, shelter costs rose 0.1%, a smaller increase than has been common in past periods of elevated inflation.

Transportation services prices fell 0.3%, further contributing to the softer services profile. Taken together, these movements suggest that some of the more persistent components of inflation are no longer accelerating, even if they have not reversed as sharply as energy-related categories.

Financial markets reacted quickly to the softer-than-expected inflation data. Stock-market futures traded mostly higher following the release, reflecting a more favorable backdrop for risk assets. At the same time, U.S. Treasury yields moved sharply lower as investors adjusted expectations for future interest rates.

Pricing in interest-rate futures showed a significant reduction in the perceived likelihood of a rate increase at the Federal Reserve’s July meeting, with estimates falling into the high teens in percentage terms from roughly the low-40s a day earlier. However, markets continued to imply that a rate hike later in the year remained possible, with roughly 60%–63% odds seen for an increase by September. The Federal Reserve’s target range for the federal funds rate stayed at 3.50%–3.75% at the time of the report.