US inflation showed a notable deceleration in June, with the headline Consumer Price Index (CPI) year-on-year growth rate dropping from 4.2% in May to 3.5%. The core CPI month-on-month change fell from 0.2% to 0.0%, with both the overall and core inflation figures coming in below market expectations. The month-on-month decline in June's CPI was primarily driven by a significant pullback in energy costs. Additionally, a negative month-on-month reading for core goods and a slowdown in the shelter component within core services contributed to the easing inflationary pace. Given the fragility of the US-Iran agreement, upside risks to oil prices persist, suggesting potential future upward pressure on US inflation. However, overall inflationary pressures are deemed manageable, and the prevailing view remains that the Federal Reserve is highly likely to keep its policy interest rate unchanged this year.
Key Data Points for June
The US CPI recorded a month-on-month change of -0.4% in June, while the core CPI was flat at 0.0%. Both the headline and core CPI month-on-month figures fell short of market forecasts. Influenced by declining energy prices, the year-on-year CPI growth rate decreased to 3.5% from 4.2% in May, below the expected 3.8%. The unadjusted core CPI year-on-year growth was 2.6%, lower than the anticipated 2.8% and down from the previous 2.9%. The 0.4% month-on-month drop in CPI was steeper than the expected 0.1% decline and marked the largest single-month decrease since April 2020, reversing from a 0.5% increase previously. The core CPI month-on-month reading of 0.0% was below both the market expectation and the prior value of 0.2%.
Drivers Behind the Inflation Slowdown
The month-on-month decline in June's US CPI was largely propelled by a substantial correction in energy costs. Concurrently, a negative month-on-month change for core goods and a deceleration in the shelter component within core services also contributed to the easing of inflation. Specifically, a previously reached US-Iran agreement contributed to a retreat in energy prices in June, leading to a 5.7% month-on-month drop in the energy index—the largest such decline since April 2020. Excluding food and energy, the core CPI showed no month-on-month growth, registering its lowest monthly increase since May 2020. Breaking it down further, core goods prices fell 0.1% month-on-month for the second consecutive month. Within this category, apparel prices dropped 0.6%, influenced by lower energy costs. Geopolitical tensions in the Middle East and economic pressures led consumers to postpone purchases of durable goods, resulting in a 0.1% month-on-month decline in the household furnishings and supplies category.
Meanwhile, the core services index showed no month-on-month growth. A key component, shelter inflation, slowed markedly, with the shelter index rising only 0.1% month-on-month (compared to 0.3% previously), marking the smallest increase since January 2021, potentially due to the fading boost from the World Cup. Looking ahead to the second half of the year, shelter inflation is expected to remain somewhat sticky. Additionally, transportation services, affected by falling energy prices, recorded a month-on-month decline of 0.3%. Overall, factors such as declining energy prices and softening consumer demand drove the slowdown in core inflation's month-on-month growth in June. However, risks of subsequent energy price increases and the stickiness of components like shelter suggest that while future US inflationary pressures are manageable, some upside risks remain.
Producer Price Trends and Inflation Outlook
The year-on-year growth rate of the US Producer Price Index (PPI) also moderated in June, indicating some easing of pressures at the production end. Data released by the Bureau of Labor Statistics showed the seasonally adjusted final demand PPI fell 0.3% month-on-month, against market expectations for it to remain flat. The unadjusted year-on-year increase narrowed to 5.5%, significantly below the expected 6.2%. The final demand PPI excluding food and energy rose 0.2% month-on-month, below the expected 0.3%, and was up 4.7% year-on-year, below the expected 5.1%. In summary, while the year-on-year final demand PPI has declined, the core PPI year-on-year trend remains at elevated levels. Furthermore, recent US inflation expectations have shown some volatility, but overall upside risks to inflation expectations are considered contained.
Assessment of Future Risks and Policy Implications
Given the highly fragile nature of the US-Iran agreement, upside risks to crude oil prices persist. Consequently, there remains some potential for upward pressure on US inflation going forward. Nonetheless, overall inflationary pressures are viewed as controllable. The maintained perspective is that there is a high probability the Federal Reserve will keep its policy interest rate unchanged this year. The US and Iran signed a memorandum of understanding in June, but within weeks, both sides accused the other of violating the agreement, leading to renewed escalation in tensions and a rebound in oil prices. Therefore, the risk of energy price rebounds remains a potential pressure point for US inflation, and the 10-year US Treasury yield also warrants vigilance for potential upside risks. It is anticipated that while upside risks to US inflationary pressures exist, they are overall manageable. Concurrently, upside risks to US inflation expectations are also seen as contained. The view that the Federal Reserve is highly likely to maintain its current policy rate this year is reiterated. Continued monitoring of the evolution of US-Iran tensions and future transit conditions in the Strait of Hormuz is warranted.
Key Risk Factors
These include unexpected changes in US-Iran conflict dynamics, unforeseen shifts in the global economy, unexpected policies from the Trump administration, surprises in US monetary policy, and other geopolitical risks exceeding expectations.
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