US consumer prices decreased last month for the first time in more than six years amid lower energy costs, though analysts were cautious with crude prices creeping back up amid renewed tensions between the US and Iran.
The consumer price index declined 0.4% in June, its first monthly drop since May 2020 and the largest decline since April 2020, the Bureau of Labor Statistics said Tuesday. The consensus in a Bloomberg-compiled survey was for the index to move down by 0.1%.
Annually, inflation cooled to 3.5% last month from May's 4.2%, compared with expectations for a 3.8% print.
Energy prices fell 5.7% in June on a monthly basis as gasoline declined nearly 10%, while food price growth held steady at 0.2%.
"Energy prices were by far the biggest driver of the general price decline in June," BMO Chief US Economist Scott Anderson said in a note. "This raises the specter that large and volatile changes in energy prices could still stoke downstream inflation pressures if the war in Iran continues."
Oil prices have rallied in July as tensions between the US and Iran escalated over control of the Strait of Hormuz, potentially putting their preliminary peace deal at risk.
Core inflation, which excludes the volatile food and energy components, was flat in June versus a 0.2% rise the month before, which was the pace of growth expected by Wall Street. The annual core measure eased to 2.6% from 2.9% in May, coming in below analysts' projection for a 2.8% increase.
"The cooler core reading was also welcome, though we would be cautious about extrapolating one month of data, especially since crude has retraced much of its June drop," TD Economics Senior Economist Leslie Preston said.
There's an 83% likelihood that the Federal Reserve will keep its monetary policy unchanged later this month, up from 58% on Monday, according to the CME FedWatch tool. The odds of a 25-basis-point rate increase fell to 17% from 42%.
"Investors and the (Fed) will breathe a sigh of relief at the size of the improvement in the inflation numbers last month, likely keeping an imminent rate hike off the table later this month," according to BMO's Anderson. "But with fighting back on in the Gulf, the (memorandum of understanding) in tatters, and energy prices heading higher again in July, the balance of risks remains more heavily weighted toward another rate hike at some point this year."
