US inflation dipped last month for the first time in six years, as lower energy prices offered a brief consumer reprieve before renewed Middle East hostilities sent oil costs higher again.
The personal consumption expenditure price index fell 0.1% month over month in June, marking the first decline since April 2020, the Bureau of Economic Analysis reported Thursday. That's in line with Wall Street's expectations and follows a 0.5% gain in May.
That helped cut the year-over-year rate to 3.7% from 4.1%, also matching the estimate in a Bloomberg-compiled survey.
The Federal Reserve's preferred inflation metric, which excludes food and energy prices, rose 0.1% month over month, the lowest reading also since April 2020, and below the 0.2% consensus estimate. The annual gauge slowed to a four-month low of 3.3%, as expected, from 3.4% in May.
"While lower gasoline prices provided a boost to households' purchasing power in June, that support may prove temporary as energy prices have moved higher amid renewed US-Iran tensions," Ksenia Bushmeneva, economist at TD Economics, said in a report.
Crude oil prices headed for a gain of around 20% for July on Thursday, following two consecutive monthly declines.
"Elevated energy prices are also clouding the inflation outlook for the Fed, keeping upside inflation risks alive, with core PCE inflation having run above the Fed's 2% target for more than five years," Bushmeneva said. "While the Fed remained on the sidelines this week, financial markets continue to price a rate hike by year-end."
The Federal Open Market Committee held the policy rate steady at its two-day meeting that ended Wednesday, in a divided decision that included three officials calling for a hike.
The probability of the central bank raising its benchmark lending rate by 25 basis points at the next policy meeting scheduled in September was at 57% on Thursday, with the remaining odds in favor of a no change, according to the CME FedWatch tool.
Consumer spending rose 0.3% in June, below the 0.4% increase expected and slower than a 0.9% gain in May.
"Consumer spending growth slowed somewhat in June, but the moderation followed two months of strong gains, capping a solid quarter," Bushmeneva said.
