US inflation cools in June as fuel prices fall, but economists warn relief may not last

US consumer inflation eased in June, aided mainly by a sharp decline in fuel prices. The Consumer Price Index (CPI) rose 3.5% compared with a year ago, lower than the 4.2% increase recorded in May, providing some relief to households dealing with high living costs.

Core inflation, which excludes food and energy prices because of their volatility, remained unchanged during the month. On an annual basis, core inflation stood at 2.6%.

The softer-than-expected inflation print cheered financial markets, but economists cautioned that geopolitical tensions and the Federal Reserve’s stance could still cloud the outlook.
“Both headline and core CPI came in much lower than expected in June, driven by lower-than-expected gasoline prices. While markets have cheered this print, ongoing developments in the Middle East, along with a hawkish Fed, may create speedbumps for a sustained rally ahead,” said Madhavi Arora, Chief Economist at Emkay Global Financial Services.
According to the US Bureau of Labor Statistics (BLS), the energy index fell 5.7% in June after posting gains in the previous three months. The drop in energy prices was the biggest factor behind the slowdown in overall inflation and helped offset increases in categories such as housing and food.

However, economists warn that the improvement in headline inflation may not last if oil prices continue to rise. Global crude prices have moved higher in recent days after renewed hostilities involving the US and Iran.

Brent crude, the international benchmark, climbed to around $86 per barrel, while US West Texas Intermediate (WTI) crude traded near $80 per barrel, the highest levels seen in about a month.

Energy costs have been a major contributor to inflation this year, particularly after geopolitical tensions disrupted oil markets. Although a temporary peace agreement between the US and Iran had earlier helped cool crude prices, recent developments have renewed concerns over supply risks.

Attention has once again shifted to the Strait of Hormuz, a key global oil shipping route. Fresh policy moves and trade-related threats involving the waterway have increased uncertainty in energy markets and raised concerns about future oil supplies.

Meanwhile, US Federal Reserve Governor Christopher Waller said the central bank should avoid reacting to old inflation trends and instead focus on current economic conditions. He noted that policymakers are mindful of the criticism the Fed faced for responding too slowly to rising inflation after the pandemic.