All eyes are on the release of the US Consumer Price Index (CPI) data tonight, which is expected to show a moderation in inflation for June. However, this potential slowdown may offer little respite to households and is unlikely to eliminate the possibility of a Federal Reserve interest rate hike this year, given ongoing geopolitical tensions in the Middle East.
The anticipated easing in the CPI is largely attributed to a retreat in gasoline prices from recent highs, following the implementation of a fragile ceasefire between the US and Iran last month. This truce, however, was short-lived. Attacks on commercial tankers in the Strait of Hormuz last week triggered military strikes between the two nations, causing gasoline prices to reverse course and climb higher.
Data from the American Automobile Association (AAA) shows the national average for a gallon of gasoline rose to $3.87 on Monday, up from $3.80 a week prior. In a related development, the US President stated on Monday that America would reinstate a blockade on Iranian shipping within the Strait of Hormuz, a critical global oil chokepoint that has become a focal point of the conflict.
"The misery index is just going from a 10 to a 9. Consumers are still in a world of hurt. We're not out of the woods," commented Brian Bethune, a professor of economics at Boston College.
A survey of economists forecasts that the Bureau of Labor Statistics will report on Tuesday that the CPI rose 3.8% in the 12 months through June. Estimates range from a low of 3.6% to a high of 4.0%. This follows May's year-over-year surge of 4.2%, which economists believe may have marked the peak for this cycle.
The Federal Reserve targets 2% inflation as measured by the Personal Consumption Expenditures (PCE) price index. The last time inflation was below that threshold was in early 2021. Minutes from the Fed's June meeting revealed heightened concern among policymakers regarding inflation last month. While the central bank held its benchmark rate steady at 3.50%-3.75% in June, new projections showed a growing inclination among officials to consider raising rates in 2026.
According to the CME FedWatch Tool, financial markets are pricing in roughly a 50.8% chance of a rate increase at the Fed's September policy meeting.
On a monthly basis, the June CPI is expected to decline by 0.1%, which would be the first monthly drop since May 2020, following a 0.5% increase in May. "Price levels are still compounding on top of each other," noted Diane Swonk, chief economist at KPMG. "Even if some grocery stores are claiming they're going to cut prices to get people back, that may not lower their overall spending because there are other things. People are still struggling to keep up."
Data from the Energy Information Administration (EIA) shows the average gasoline price fell to $4.18 per gallon in June from $4.61 in May, which was the highest level since July 2022. Current prices, however, remain significantly above pre-conflict levels.
The modest relief at the pump may be offset by an expected rise in food prices, following a slight increase in May. Economists warn that the US-led conflict with Iran, which has driven up fertilizer prices and distribution costs, combined with drought conditions in parts of the country, could push food prices higher later this year and into 2027.
Excluding the volatile food and energy components, the core CPI is forecast to have risen 2.8% year-over-year in June, down from 2.9% in May. The so-called core CPI is expected to have increased 0.2% month-over-month, matching May's gain.
Some economists view the modest core reading as a positive sign. "What's most important for Fed officials is core inflation, which is not directly affected by oil prices," said Andrew Hollenhorst, chief US economist at Citigroup. "A prior concern was that higher energy costs would 'pass through' to core inflation, but aside from somewhat firmer airfare prices—which should now reverse—higher oil prices have not significantly boosted core inflation."
Other analysts are less optimistic, arguing that the tempered core CPI data suggests underlying inflation remains sticky, keeping rate hike expectations for this year on the table. They point to persistently high input prices and longer supplier delivery times in business surveys. Producer price data also hints at upcoming price pressures.
For June, the monthly core CPI is expected to be driven by price increases in services and hotel rooms linked to a major sporting event. Auto insurance is also forecast to rebound after recording its largest drop since October 2020 in May. Airfare and rent are projected to see modest increases.
Core goods inflation is likely to be flat on a monthly basis. Economists note that price increases announced by a major technology company in late June may show up in July's data. They suggest the pass-through effect from tariffs is fading, though apparel prices may have risen and furniture prices may have rebounded.
"The June CPI report is unlikely to tilt the scales decisively for or against the Fed tightening policy this year," concluded Samuel Tombs, chief UK & US economist at Pantheon Macroeconomics.
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