Reviving Gulf conflict threatens to undo June's relief and force the Fed's hand
Falling gasoline prices pulled US inflation lower in June, yet a US Federal Reserve interest rate increase stayed on the table for 2026 as renewed fighting between the United States and Iran sent energy costs climbing again.
The US consumer price index fell 0.4 percent from May, the largest one-month drop since April 2020, the US Bureau of Labor Statistics reported on Tuesday.
US annual inflation eased to 3.5 percent from 4.2 percent in May, according to the bureau, and Reuters noted the reading landed below the 3.8 percent that economists it polled had expected.
US core prices, which exclude food and energy, held flat over the month and rose 2.6 percent over the year, down from 2.9 percent in May, the bureau said.
That gauge remains above the US Fed's 2 percent target, which the central bank tracks through the personal consumption expenditures index.
Cheaper energy drove most of the pullback.
The US energy index dropped 5.7 percent in June, its steepest monthly fall since April 2020, as gasoline sank 9.7 percent, the bureau reported, though gasoline still sat 26.7 percent higher than a year earlier.
Oil prices had slid through June, CNBC reported, dropping from more than US$90 a barrel to roughly US$73 by month's end after a mid-June ceasefire between Washington and Tehran took hold.
That truce has since unravelled.
According to Reuters, the ceasefire collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the two countries and a renewed US naval blockade of Iran.
Brent crude climbed to a four-week high, and the national US gasoline average rose to US$3.86 a gallon from US$3.79 a week earlier, Reuters said, citing AAA data.
Scott Anderson, chief US economist at BMO Capital Markets, told Reuters that renewed Gulf fighting, a collapsed MOU and rising July energy prices had shifted the outlook.
The balance of risks now leans "toward a rate hike at some point this year," he said.
The report gave US Fed officials some room ahead of their meeting later this month, economists said, though several cautioned that the data had already been overtaken by events.
"For the Fed, this is a relief, but not enough to put it at ease," Carl Weinberg, chief economist at High Frequency Economics, said in comments reported by Reuters, adding that he expected prices to accelerate again as energy costs rose.
Kevin Warsh, the US Fed chair, told Congress on Tuesday the central bank had "no tolerance for persistently elevated inflation," Reuters reported, and pledged that the inflation surge of the past five years would become "a thing of the past."
He gave no signal on the US central bank's next move.
US policymakers remain split, according to minutes of the Fed's June 16-17 meeting cited by AP, with about half backing an increase by year end and the rest willing to wait for firmer evidence that inflation is cooling.
Traders trimmed their bets after the report, with the odds of a July US rate hike falling to 16 percent from 42 percent a day earlier on CME's FedWatch tool, Reuters reported, though the probability of an increase at some point in 2026 held at 80 percent.
For Canadian markets, the softer US print supported risk appetite.
The S&P/TSX composite index closed up 0.19 percent at 35,320.54 on Tuesday, near the record it set last month, as financial and mining shares advanced, Reuters reported.
The materials sector gained 1.38 percent as metal prices rose against a weaker US dollar, while financials added 0.71 percent.
Attention now shifts to the Bank of Canada, which markets expect to hold its policy rate at 2.25 percent on Wednesday, according to Reuters.
"People will be looking to see what kind of a reaction do we get in terms of any commentary from the Bank of Canada regarding inflation," Colin Cieszynski, chief market strategist at SIA Wealth Management.
Beneath the headline, some US categories signalled easing pressure.
Apparel prices fell 0.6 percent and core goods slipped 0.1 percent for a second straight month, which Reuters said suggested the pass-through from US tariffs may be over, while shelter rose just 0.1 percent, the smallest monthly gain since January 2021, the bureau reported.
Not everyone was convinced.
"I am highly skeptical that inflation has just rolled over," Stephen Stanley, chief US economist at Santander US Capital Markets, told Reuters.
