US inflation eased to 3.5% in June as energy prices fell

U.S. consumer inflation slowed to 3.5% in June from a year earlier, down from 4.2% in May, the Bureau of Labor Statistics said Tuesday. The pullback, the first decline in the annual rate since January, reflected a sharp fall in energy and gasoline prices after oil retreated during a temporary easing of U.S.-Iran tensions.

On a monthly basis, the consumer price index fell 0.4%, the largest one-month decline since April 2020, according to the BLS. The agency said the energy index accounted for the bulk of the decrease, offsetting increases in categories including shelter and food.

The CPI tracks changes in prices paid by urban consumers for a basket of goods and services. Because energy feeds into transport, manufacturing and household bills, changes in oil and fuel prices can move through the broader economy, affecting everything from airfares to grocery distribution costs.

Energy prices were still 15.7% higher than a year earlier in June, while gasoline was up 26.7% and fuel oil rose 43% on an annual basis, BLS data showed. The monthly direction was different: gasoline prices dropped about 10% in June, fuel oil fell 9%, and the broader energy index declined 6%.

Mark Zandi, chief economist at Moody’s, said the June reading indicated that inflation had likely passed a near-term peak, provided the conflict does not intensify again. He identified a renewed war and a potential closure of the Strait of Hormuz as the principal threat to the inflation outlook.

Oil and the Fed

Global oil prices fell during June from more than $90 a barrel to about $73 by month-end after the U.S. and Iran reached a temporary ceasefire in mid-June. By Tuesday morning, after renewed hostilities, global oil prices had risen to about $86 a barrel at 9:45 a.m. ET.

Goldman Sachs Research wrote in a Sunday note that a serious escalation would revive a key upside risk to inflation and increase the likelihood of rate increases. The Federal Reserve uses inflation data, among other indicators, when setting interest rates, and aims for inflation of about 2% over the long run.

Before the June CPI release, Federal Reserve policymakers had signaled that higher borrowing costs could be considered to restrain inflation. Tom Porcelli, chief economist at Wells Fargo, said his firm expects inflation to keep slowing over the coming year and does not see a compelling case for a rate rise at this stage.

Core prices and household categories

Excluding food and energy, CPI rose 2.6% from a year earlier in June, according to the BLS. That measure is watched because it strips out two volatile categories, although consumers still face those costs directly.

Food inflation remained uneven. Food at home rose 2.7% from a year earlier, while food away from home increased 3.4%. Fruits and vegetables were up 5.3%, with lettuce rising 32.1% and tomatoes 19.5% annually. Tomatoes fell 10% on the month, while instant coffee and roasted coffee also declined from May.

Vehicle-related prices were mixed. New vehicle prices were up 0.5% from a year earlier, used cars and trucks fell 1.8%, motor vehicle maintenance and repair rose 7%, and motor vehicle insurance declined 4.1%. Zandi attributed the fall in used vehicles to weak demand tied to affordability concerns.

Other categories showed pressure in narrower areas. Airline fares rose 26.5% from a year earlier, apparel increased 3.9%, rent of primary residence rose 2.8%, and tobacco and smoking products climbed 6.5%, according to the BLS.

This story draws on original reporting from CNBC.