Stay informed with free updates
Simply sign up to the US inflation myFT Digest — delivered directly to your inbox.
US inflation fell sharply to 3.5 per cent in June as lower petrol prices helped tame a surge in costs for Americans after three months of sharp increases, prompting traders to rein in bets on higher interest rates.
Tuesday’s figure from the Bureau of Labor Statistics was down from an annual rate of 4.2 per cent in May and marked a sharper drop than the 3.8 per cent predicted by economists polled by Bloomberg.
On a month-on-month basis, the consumer price index fell 0.4 per cent compared with May’s figure, the biggest decline since the outbreak of the Covid-19 pandemic in April 2020, driven by a 9.7 per cent drop in the index tracking petrol.
Core inflation, stripping out volatile food and energy prices, was 2.6 per cent on an annual basis, down from 2.9 per cent the previous month.
The report came ahead of an appearance by Federal Reserve chair Kevin Warsh before a congressional committee on Tuesday where he told lawmakers the central bank had “no tolerance for persistently elevated inflation”.
Analysts said the weaker than expected inflation data will ease pressure on the central bank to immediately raise interest rates.
“The very benign June CPI inflation report gets Warsh off the hook in terms of pressure to hike near-term and allows him to position the Fed as resolutely committed to bringing inflation back to target without fuelling expectations of a July move,” said Krishna Guha at Evercore ISI.
Some content could not load. Check your internet connection or browser settings.
Treasury yields dropped as investors bet the Fed would be slower to raise rates. The two-year Treasury yield, which moves with monetary policy expectations, fell 0.1 percentage points to 4.15 per cent before retracing some of that move.
Traders in futures markets now expect the Fed’s next quarter-point rise by December, having anticipated such a move by October before the data release, and cut bets on a second rate increase next year. The dollar fell sharply, losing 0.5 per cent against a basket of major currencies.
Tuesday’s report relates to a period of respite in the Middle East war, which sent energy prices soaring when it broke out in February and the Strait of Hormuz was largely closed to maritime traffic. The US and Iran agreed a ceasefire in mid-June, but hostilities have flared again in the past week.
Still, analysts said the drop in core inflation signalled that underlying price pressures were not as bad as some had feared. Fed governor Chris Waller had warned on Monday that a “hot” core figure would push the Fed “to consider tightening monetary policy in the near term”.
Prices for a range of goods — including used cars and trucks and clothing — fell versus the previous month, suggesting inflation remained contained.
Luke Tilley, chief economist at M&T Bank and Wilmington Trust, said higher petrol prices in recent months had forced consumers to lower spending elsewhere, leading some businesses to slash prices.
“Consumers are not strong enough to pay the increased prices at the pump and then also afford the other price increases,” said Tilley, a former official at the Philadelphia Fed. “So what we’ve been . . . seeing is consumers cutting back on other things and basically relieving price pressures.”
Analysts warned that the relief could be shortlived, however, as tensions rise once again in the Middle East.
Oil prices rose to a high well above $100 a barrel after the conflict broke out before falling to slightly more than $70 this month as energy exports through the strait recovered. But Brent crude climbed back above $80 this week as the US and Iran threatened to block the waterway once more.
“This is welcome news for the Fed, but it is hardly mission accomplished,” said Omar Sharif at Inflation Insights.
Data visualisation by Ray Douglas and Eva Xiao
