US June CPI Drops to 3.5%, Sharply Below 3.8% Forecast
June inflation came in well below expectations at 3.5% annually, with a plunging energy index driving the biggest monthly decline in years.
U.S. consumer prices rose just 3.5% year-over-year in June, the Bureau of Labor Statistics reported, badly missing the 3.8% consensus forecast and falling sharply from May's 4.2% reading. On a monthly basis, the headline CPI dropped 0.4% — far below the 0.1% decline economists had projected — marking one of the steepest single-month retreats in recent memory. The core reading, which strips out food and energy, came in flat month-over-month against a +0.2% expectation, holding the annual core rate at 2.6% versus the 2.8% forecast.
Energy prices led the retreat, tumbling 5.7% in June after rising 3.9% in May — the largest monthly energy decline since April 2020. Gasoline alone fell 9.7% on the month. Shelter costs, long a stubborn driver of inflation, rose just 0.1% in June, the smallest monthly gain since January 2021, as owners' equivalent rent climbed 0.2% and primary rent edged up only 0.1%. Motor vehicle insurance fell 2.0%, its second consecutive monthly decline, while lodging away from home dropped 2.3% and apparel slid 0.6%.
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Markets moved decisively on the data. Federal funds futures, which had been pricing in 9.2 basis points of rate hikes at the July 29 Fed meeting before the report, collapsed to just 3.9 basis points afterward. Year-end rate-hike expectations fell from 41 basis points to roughly 32.7 basis points, signaling that traders now see significantly less pressure on the Federal Reserve to tighten further. The soft core print — the flattest since January 2021 — gives the FOMC analytical cover to focus on the 2.6% core trend rather than the still-elevated headline number.
Not everything pointed to disinflation. Recreation prices rose 0.5% and household furnishings gained 0.2%, with some goods categories still showing signs of tariff-related price pressure. Airfares remain elevated at 26.5% above year-ago levels despite a modest 0.2% monthly uptick. A critical wildcard looms: oil prices have surged more than 10% in a week amid renewed geopolitical conflict, and a tight refining market has kept gasoline prices elevated — raising real questions about whether June's energy-driven relief will persist into July and beyond.
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