U.S. inflation slowdown keeps Fed rate hike risk in focus

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US inflation slowdown and Fed risk

Highlights

U.S. June Consumer Price Index rises 3.5% year-on-year versus 4.2% in May, with monthly CPI falling 0.4% against expectations for a 0.1% decline.
Decline in inflation driven by lower gasoline prices amid a U.S.-Iran ceasefire, but recent attacks in the Strait of Hormuz and U.S. naval blockade push fuel costs and oil prices higher.
Federal Reserve leaves benchmark rate at 3.50%-3.75% in June but signals increased likelihood of a 2026 hike, with markets pricing a 51.9% probability of a move in September.

June inflation data and energy reversal

As reported by Reuters, citing the Labor Department's Bureau of Labor Statistics, the Consumer Price Index rises 3.5% in the 12 months through June after increasing 4.2% in May, while the monthly reading falls 0.4% after a 0.5% gain in the prior month.

Economists polled by Reuters had expected annual inflation of 3.8% and a 0.1% monthly decline. Excluding food and energy, core CPI rises 2.6% from a year earlier after 2.9% in May, while the monthly core reading is unchanged following a 0.2% increase.

The retreat in headline inflation largely reflects lower gasoline prices after a fragile ceasefire between the U.S. and Iran takes hold last month. That pause collapses last week after commercial tankers come under fire in the Strait of Hormuz, setting off military strikes between the United States and Iran.

Fed outlook and market implications

Fuel costs are already reversing higher, with AAA data showing the national average for gasoline at $3.86 a gallon on Tuesday, up from $3.79 a week earlier. Oil prices also climb to a four-week high after the U.S. reimposes a naval blockade of Iran, tightening concern over a key global supply route.

The Federal Reserve keeps its benchmark rate unchanged at 3.50% to 3.75% at its June meeting, but updated projections show growing support for a rate increase in 2026. Minutes from the June 16-17 meeting, published last week, show policymakers' inflation concerns mounting, and before the CPI release, financial markets price a roughly 51.9% chance of a rate hike at the September 15-16 meeting, according to CME's FedWatch tool.

In our earlier article on WTI rebounding as Middle East tensions revived supply concerns, we explained how the latest U.S.-Iran escalation brought Strait of Hormuz shipping risks back into focus, adding a geopolitical risk premium to crude. We also noted that while broader supply and demand signals were mixed, tighter U.S. inventories and higher oil prices could keep inflation expectations elevated and complicate the Federal Reserve policy outlook.

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