NEW YORK, July 14 (Reuters) – U.S. consumer inflation slowed more than expected in June, easing anxiety in markets that have been edgy about the prospect of price pressures forcing Federal Reserve rate increases in coming months.
The Consumer Price Index increased by a still-high 3.5% in the 12 months through June after surging 4.2% in May, which was the largest year-on-year rise since April 2023, data from the Labor Department’s Bureau of Labor Statistics showed on Tuesday. The CPI fell 0.4% over the month after advancing 0.5% in May. Economists polled by Reuters had forecast the CPI rising 3.8% year-on-year and dipping 0.1% on a monthly basis.
The pullback in the CPI mostly reflects a retreat in gasoline prices from multi-year highs as a fragile ceasefire between the U.S. and Iran took hold last month. That truce, however, collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran.
Excluding the volatile food and energy components, the CPI increased 2.6% year-on-year in June after rising 2.9% in May. The so-called core CPI inflation was unchanged over the month, after gaining 0.2% in May.
The report comes with Fed Chair Kevin Warsh on Capitol Hill on Tuesday to discuss monetary policy and related issues with Congress.
MARKET REACTION:
STOCKS: U.S. stocks opened mostly higher after the report, with the S&P 500 up 0.2% and the Nasdaq up 1%.
BONDS: Treasury prices rose, sending yields lower, with the 2-year Treasury yield down 7 basis points at 4.191% and the 10-year Treasury yield down 3 basis points at 4.575%.
FOREX: The dollar fell 0.6% to 100.7.
COMMENTS:
JAMIE COX, MANAGING PARTNER AT HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA:”You have a really strong consumer backdrop which is one of the most important parts of this equation. As long as consumption stays high, the economy will stay strong and that unfortunately does run contrary to the inflation story.
“But the long-awaited deflationary component of AI is starting to show up. So that’s the one thing that people are underestimating because the cost of the AI infrastructure buildout is so high and it’s creating lots of cost pressures on that side, they’re ignoring the benefits and what you’re going to see in the coming quarters is something that runs against what the conventional wisdom which is that energy prices and consumption are going to just automatically mean rises in inflation without accounting for the offsets of the deflationary forces of AI. So that is going to surprise a lot of people and this is the first print that you will see of many that will show inflation abating.”
ART HOGAN, CHIEF MARKET STRATEGIST, B RILEY WEALTH, NEW YORK:
“In real time, you’ve seen a quick change to the expectations for a July rate hike and the CPI came in very much cooler than had been expected both at the headline level and at the core level and that has shifted out any expectations for a potential hike in July. Now that expectation was only about 45% for the July meeting.
“So, there wasn’t a majority of people thinking that there was going to be a rate hike in July, but there was some potential, and I think this is one piece of news that likely pushes the concept of a rate hike out further on the calendar.
“I think that the other thing to contemplate is that the headline number was helped by a large decrease in the price of energy during the month, and that’s reversed itself this month. So, you know, we’ll have to wait and see and look at the next CPI report to see if that changes expectations for a rate hike, but in the here and now, I think any concept of a July rate hike has been pushed down the road to later months.”
MARK HACKETT, CHIEF MARKET STRATEGIST, NATIONWIDE INVESTMENT MANAGEMENT GROUP, PHILADELPHIA:
“A minor sigh of relief — the numbers were light, which is a modest positive, but the relative lack of reaction is a reminder that the markets have not been as reactive to inflation, the Fed, geopolitics or rates in recent months. This is a modest positive but not enough to be the catalyst we need to break out to record highs. All eyes are on earnings season.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“This (report) is a bit of a surprise. And obviously, it all reflects one thing, the fall in energy prices. This should help relieve some worries in the bond market, and it should give some wiggling room for the Fed.
“Obviously, it negates the possibility of a rate cut in July. And with Mr. Walsh headed to Capitol Hill this morning, this might give him some ammunition to talk about the prospects of falling inflation in the future.
“I expect (Warsh) to be cautious, obviously. But like I said a few minutes ago, I think today’s numbers might just give him some leeway to express some hope that inflation remains contained, it remains tied to energy prices and is not necessarily being fueled by AI.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“AI isn’t showing up much in CPI, yet. Information technology commodities prices fell 0.9% over the last month. Smartphone prices fell 0.8%. That could change with the July through September numbers as Apple and others announced price hikes are coming. Computer software and accessories prices are up 17.4% from a year ago, but that only makes up 0.03% of the consumer basket. The more important thing for consumer sentiment is that energy number. Regular unleaded gasoline prices were still up more than 27% from a year ago even with the 10% drop in prices in June.
“Headline CPI is hot, but it’s not rotten to the core.”
(Reporting by P. Avinash, Tharuniyaa Lakshmi, Chuck Mikolajczak, Stehpen Culp, Chibuike Oguh; editing by Colin Barr)
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