By Lucia Mutikani
WASHINGTON, July 14 (Reuters) – U.S. consumer inflation slowed more than expected in June as energy prices retreated, but the moderation was insufficient to convince financial markets to take an interest rate increase from the Federal Reserve this year off the table against the backdrop of renewed conflict in the Middle East.
The Consumer Price Index from the Labor Department on Tuesday also showed underlying inflation subsiding last month amid declines in the costs of motor vehicle insurance, communication, apparel, healthcare as well as used cars and trucks.
Fed Chair Kevin Warsh in prepared remarks to lawmakers on Tuesday said the U.S. central bank had “no tolerance for persistently elevated inflation.”
“It appears less likely that the Fed will raise rates over the next few meetings,” said Jeffrey Roach, chief economist at LPL Financial. “However, we may still be at an inflection point, given the risk that the energy shock could spill over into other categories of consumer prices. A positive resolution with Iran before the end of the summer is becoming increasingly important.”
The CPI increased by a still-high 3.5% in the 12 months through June after surging 4.2% in May, which was the largest year-on-year rise since April 2023, data from the Labor Department’s Bureau of Labor Statistics showed.
The CPI fell 0.4% over the month, the first decline since April 2020, after advancing 0.5% in May. Economists polled by Reuters had forecast the CPI rising 3.8% year-on-year and dipping 0.1% on a monthly basis.
The pullback in the CPI mostly reflected a 5.7% drop in energy prices, the largest monthly decline since April 2020, after rising 3.9% in May as a fragile ceasefire between the U.S. and Iran took hold last month. Gasoline prices tumbled 9.7%.
The truce, however, collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran.
Gasoline prices have reversed course as a result, with the national average rising to $3.86 a gallon on Tuesday from $3.79 a week ago, data from motorist advocacy group AAA showed. Gasoline prices rose 26.7% year-on-year.
U.S. stocks opened higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
OIL PRICES ARE RISING AGAIN
Further increases are likely as oil prices rose to a four-week high on Tuesday after the U.S. reimposed a naval blockade of Iran. President Donald Trump said on Monday the United States would reinstate a blockade in the Strait of Hormuz, a vital route for global oil supplies, that has become one of the main battlegrounds of the conflict.
Food prices rose 0.2%, matching May’s gain. They advanced 3.0% year-on-year in June. Grocery prices climbed 0.2%, lifted by a 4.3% jump in the cost of eggs and a 1.2% increase in dairy products. But prices for nonalcoholic beverages fell 1.5%, with coffee declining 2.0%. Fruits and vegetables were 0.2% cheaper. They, however, increased 5.3% year-on-year.
Excluding the volatile food and energy components, the CPI increased 2.6% year-on-year in June after rising 2.9% in May. The so-called core CPI inflation was unchanged over the month, after gaining 0.2% in May. Core inflation was restrained by a 2.0% drop in motor vehicle insurance, which followed a 1.7% decline in May. The cost of communication decreased 1.5% over the month while apparel prices fell 0.6%.
Prices for used cars and trucks slipped 0.2%. The cost of shelter rose 0.1%, the smallest monthly gain since January 2021. Owner’s equivalent rent increased 0.2%, while prices for hotel and motel rooms dropped 2.3%. The cost of recreation increased 0.5% while prices for household furnishings and operations rose 0.2% as did the cost of personal care.
The Fed tracks the Personal Consumption Expenditures Price Indexes for its 2% inflation target. Financial markets expected the central bank to leave its benchmark overnight interest rate unchanged in the 3.50%-3.75% range this month. Traders, however, saw a 60% chance of a rate hike in September.
Inflation was last below 2% in early 2021. Minutes of the Fed’s June 16-17 meeting published last week showed policymakers’ concerns about inflation mounted last month.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )