US inflation fell more sharply than expected in June, driven by a steep decline in energy prices and easing immediate pressure on the Federal Reserve to raise interest rates.
However, renewed tensions with Iran and a rebound in oil prices mean policymakers are likely to remain cautious ahead of July’s meeting.
Experts are reacting to the latest data below:
Lindsay James, investment strategist at Quilter:
“In what is a fairly high-stakes data point, US inflation has taken the immediate pressure off the Federal Reserve to raise rates as figures came in lower than expected. Inflation for June was 3.5%, below the expectations of 3.8% and a considerable drop on the 4.2% registered the previous month, whilst core inflation rose 2.6% in 12 months, also below market expectations of 2.8%. While Kevin Warsh has now firmly got his feet under the table, it does not mean rate cuts are looming in order to appease President Trump. Instead, we are likely to see a conservative outlook from the Federal Reserve when it meets in a fortnight.
“Recent comments from Federal Reserve member Christopher Waller underline that the central bank is keen not to be seen as repeating their post-pandemic mistake of being too late to tame inflation and that a lack of progress on core inflation could signal a rate hike coming sooner rather than later.
“Whilst a sharp drop in US gas prices in June means that the headline level of annual inflation is lower, core inflation, which strips out energy and food prices, remains well above the target rate of 2%. The labour-intensive service economy is a meaningful factor in this, with a resilient labour market one reason, not only driving wages higher but also supporting consumer spending and service-sector demand.
“Clearly these falls in inflation are to be welcomed, but they come at a time of a resurgence in oil prices, due not only to the resumptions of attacks in the Middle East but also because of the demands by Donald Trump that the US will charge a 20% fee on cargos transiting the Strait of Hormuz. Whilst this eventuality looks highly unlikely to ever materialise, not least because of the inability of the US to control these waters, the question of tolls in the region is one that isn’t going away whilst the pathway to a lasting agreement looks ever more challenging in the near term.”
Isaac Stell, Investment Manager at Wealth Club, commented.
“US monthly inflation surprised to the downside in June with the largest 1-month decrease in the headline rate since the depths of the Covid Pandemic in April 2020.
The biggest contributor to the fall in inflation came from the energy index which fell 5.7 percent month-on-month following a sharp rise in three prior months. The decline in the oil price tracked the optimism of a potential peace deal touted during June followed by the issuance of a memorandum of understanding between the US and Iran. The price of a barrel of oil subsequently fell from $94 at the beginning of the month down to $73, offering some relief to consumers at the pump.
These latest figures, although very positive, are backwards looking. In the last few days alone, Trump has declared the war is back on with Iran and the oil prices have reacted accordingly with the price of Brent Crude rising again to $86. Prior to the release of todays inflation figures, markets were pricing in a 50% chance of a rate hike at the Fed’s next meeting in July, that now looks less likely. The Fed will be cognizant however of the evolving geo-political landscape and a rate hike cannot be assumed to be completely off the cards.”
Garry White, Chief Investment Commentator at Raymond James, comments:
“Markets are paying closer attention to economic data following the appointment of Kevin Warsh as Federal Reserve chair because investors have less certainty about the future path of monetary policy. That’s why today’s inflation data was significant. As Mr Warsh intends to provide less guidance to the market on future policy decisions, the market was anticipating the data slightly more than usual. It was good news for the doves, with all the major inflation metrics coming in better than expected. Markets will be relieved. The unchanged monthly core inflation reading suggests underlying price pressures have plateaued or eased during June.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) comments:
“The downside surprise in US inflation, from a market point of view, is stale. Yes, both the headline and core number, which strips out volatile components such as energy and food, surprised to the downside. But the miss is mostly related to the past declines in oil prices, which have started to climb again as geopolitical risks rise.
So, while the Fed and investors alike might be slightly relieved that we got a weak number even going beyond energy-related effects, the forward-looking view is more nuanced. If no resolution to renewed US-Iran tensions is found soon, gasoline prices will start picking up again, and the feedthrough of energy into broader categories of producer and consumer prices will get stronger soon.
This is why we still think it’s more likely than not that the Fed will hike interest rates later this year. Yet we think market expectations remain on the hawkish side and we believe that a series of rate increases is less likely.
And, if oil prices were to resume their downtrend, we wouldn’t be surprised if the central bank reversed course rapidly and cut. After a solid rally, we have slightly reduced our overall equity allocation, locking in gains.
Most of this reduction comes from our European equity market exposure, although we have also slightly trimmed our US equity holdings to take some profits. We are still constructive on equities and continue to hold a moderate tactical overweight.
We have reallocated the proceeds to European money markets, where yields have become more attractive following the latest European Central Bank rate hike. We have also reallocated to government bonds, which may provide diversification if markets become more volatile.”
Lukman Otunuga, Head of Market Research at FXTM, said:
“Markets are entering one of the busiest sessions of the month, with geopolitics, earnings, inflation and central bank commentary all competing for investors’ attention.
The major US banks will offer an important health check on the economy, but the real focus will be on what executives say about the outlook for consumers, businesses and financial markets for the remainder of the year. Given the banking sector’s weighting in the Dow Jones, these results have the potential to move the broader market.
At the same time, renewed tensions in the Middle East have once again put oil prices and inflation back in focus. The combination of the June CPI report and Fed Chair Kevin Warsh’s testimony could significantly reshape expectations around US interest rates if policymakers signal that inflation risks remain elevated.
Gold also faces a pivotal test. While geopolitical uncertainty continues to underpin safe-haven demand, higher oil prices could reinforce expectations for tighter monetary policy, creating a headwind for the non-yielding metal. The $4,000 level remains a key technical support, with a break below potentially opening the door to $3,900 and $3,850, while a successful defence could see prices recover towards $4,100.”
Katy Stoves, Investment Manager at Mattioli Woods, said:
“Headline inflation has decreased following last month’s reduction in Middle East tensions, after the US and Iran reached a Memorandum of Understanding.
“There is potentially a structural bid beneath oil that markets may be underestimating: governments that drew down strategic petroleum reserves recently now need to replenish them. This represents a persistent source of demand which, combined with renewed escalation of tensions in the Strait of Hormuz, suggests the window to buy cheaply may be closing quickly. Sustainably higher oil prices are a real scenario, not a tail risk.
“Meanwhile, despite the recent fall, inflation remains stubbornly above the 2% target, services remain sticky, and Warsh doubled down on price stability in his latest speech. With growth solid and the labour market tight, the Fed’s bias looks more likely to shift towards hikes than cuts.”
