An inflation respite
June CPI came in well below expectations, with headline CPI falling 0.4% MoM and +3.5% YoY (vs. +3.9% consensus). Core CPI was flat MoM and +2.6% YoY, driven primarily by a sharp drop in gasoline prices—the largest monthly decline since 2022—which more than offset still-elevated shelter and services costs. June PPI similarly surprised to the downside, with headline PPI falling 0.3% MoM and rising 5.5% YoY (vs. +6.2% consensus). Core PPI ex-food and energy rose just 0.2% MoM and 4.7% YoY (vs. +0.3% and +5.1% consensus, respectively), as a 6.4% MoM plunge in energy prices drove the broad deceleration.
June’s PCE report, the Fed’s preferred inflation gauge, will be released on July 30th—a day after the Fed’s next meeting—with consensus estimates also calling for a cooling in the headline and core readings. Despite CPI and PPI YoY indicators still hovering near multi-year highs (Figure 8), this was a needed reprieve for Fed fund futures pricing. Before the most recent inflation reads, markets were pricing in a 43% chance of a hike at the July 29th meeting vs. around 26% as of this writing.
Headlines regarding a more concrete resolution or agreement between the U.S and Iran will likely remain volatile in the interim. However, if taking our cues from market-based inflation indicators (Figure 9), they continue to portend for an aversion of the left tail-risk scenarios of a more protracted and prolonged conflict which could retest the April highs in oil prices.
