Inflation Drops to 3.5% in June as Energy Prices Plunge

Quick Facts

The CPI fell 0.4% in June, the largest one-month drop since April 2020, bringing the annual rate to 3.5%
Energy prices fell 5.7% on the month, with gasoline down 9.7%, driving the overall decline
Core CPI, excluding food and energy, was flat month-over-month, putting the 12-month rate at 2.6%

Consumer prices fell sharply in June, offering the first break from five consecutive months of rising inflation. The Bureau of Labor Statistics reported Tuesday that the Consumer Price Index dropped 0.4% on a seasonally adjusted basis, pushing the annual rate to 3.5%. Economists polled by LSEG had forecast a 0.1% monthly decline and a 3.8% annual gain.

The drop was the largest single-month decrease since April 2020. Annual inflation stood at 4.2% in May and 2.4% in January.

Energy prices drove the decline. The energy index fell 5.7% in June after rising 3.9% in May. Gasoline prices dropped 9.7% during the month, though pump prices remain 26.7% higher than a year ago.

Core inflation, which strips out food and energy, came in flat for the month. The 12-month core rate landed at 2.6%, well below the consensus forecast of 2.9%. Services costs excluding energy were flat, shelter rose just 0.1%, and transportation services fell 0.3%.

Food prices rose 0.2% for a second straight month. Grocery store prices edged up 0.2% and restaurant prices gained 0.2%. Apparel prices fell 0.6%. New vehicles were flat and used cars and trucks declined 0.2%.

The Labor Department followed with a favorable Producer Price Index reading Wednesday. The overall PPI fell 0.3% in June. A core index excluding food, energy, and trade services rose just 0.1%.

Federal Reserve Chairman Kevin Warsh pushed back against any declaration of victory. “There might be some that look at this morning’s data and say, ‘Oh, mission accomplished, everything is swell,’” Warsh said. “That is not my view.” Warsh told the House Financial Services Committee the FOMC has “no tolerance for persistently elevated inflation.”

Other economists were more encouraged. “This is good news for the nation, for the Federal Reserve and for many middle-income and moderate-income Americans who were desperate for some relief on inflation,” said Heather Long, chief economist at Navy Federal Credit Union. She cautioned the relief could be short-lived given ongoing geopolitical risk.

Mark Zandi, chief economist at Moody’s, said the data suggests inflation has peaked. “The biggest threat is that things unravel and we’re back to full-blown war with the Strait [of Hormuz] shut down,” he said.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the report gives the Fed room to hold rates steady. “By surprising on the downside, it relieves immediate pressure for action” and “makes it considerably easier for policymakers to maintain their current wait-and-see stance through the next meeting,” she said.

Jeffrey Roach, chief economist at LPL Financial, said the benign core reading makes near-term rate hikes less likely. “A positive resolution with Iran before the end of the summer is becoming increasingly important,” he said, citing the risk that an energy shock could spread to broader consumer prices.

Markets responded positively. The S&P 500 gained 0.5%, the Nasdaq Composite rose 1.1%, and the Russell 2000 added 0.4%. Treasury yields fell sharply following the report.

For retailers and brands, the June data brings some near-term relief on input costs. Apparel prices fell 0.6%, a category sensitive to both energy and tariff pressures. Whether that relief holds depends heavily on energy markets and the geopolitical situation heading into the fall.