June CPI Signals Cooling Inflation, but Fed Expected to Hold Steady

Key Takeaways

• June’s inflation data came in below economists’ expectations, reaching its lowest monthly level in over six years, according to the Bureau of Labor Statistics.
• The drop was mainly due to falling energy prices as tensions over the Iran war eased last month, analysts say.
• Markets expect the Fed to take a wait-and-see approach to interest rates, as rising energy prices may drive up inflation if geopolitical tensions continue.

June’s Consumer Price Index report brought good news on inflation across the board—enough to keep the Federal Reserve on hold for now, but not enough to foreclose a rate hike later this year.

Consumer prices declined in June as gas prices dropped, signaling a soft end to the surge that had driven inflation to a three-year high amid price pressures from the closure of the Strait of Hormuz. While inflation is still running above the Fed’s target, it’s starting to show broad-based cooling, economists say.

With the renewed rise in energy prices in July due to the resumed conflict in the Middle East, policymakers appear to be waiting to see more positive inflation news across the economy before deciding when to tighten, economists say.

The Bureau of Labor Statistics reported that the CPI increased 3.5% in June from year-ago levels after increasing 4.2% in May. Year-over-year core CPI (which excludes volatile food and energy costs) rose 2.6%, lagging the May rate of 2.9%.

Overall inflation fell 0.4% month over month, its largest drop since April 2020, after rising 0.5% in May. Core inflation held steady after May’s 0.2% increase.

Economists expected CPI to fall 0.2% on a monthly basis and increase 2.9% year over year in June, according to consensus estimates from FactSet. Core CPI was expected to rise 0.2% on a monthly basis and 2.8% from its year-ago levels.

“This is the best news on core inflation we’ve gotten in 2026,” says Morningstar senior economist Preston Caldwell. “Although the Fed almost never reacts heavily to a mere one month’s data‚ the magnitude of today’s result is likely to tip the Fed decisively against a July rate hike."

June CPI Inflation Report Highlights

• CPI decreased 0.4% for the month after rising 0.5% in May.
• Core CPI remained unchanged after rising 0.2% in May.
• CPI increased 3.5% year over year after increasing 4.2% the prior month.
• Core CPI rose 2.6% from year-ago levels after rising 2.9% in May.

Food prices increased 0.2% in June after rising by the same amount in May. Grocery and restaurant prices each rose 0.2%. Overall energy prices decreased 5.7% after rising 3.9% last month, while utility gas prices rose 0.5%, fuel oil prices decreased 9.2%, gasoline prices fell 9.7%, and electricity prices decreased 1.0%. Shelter prices rose 0.1% after rising 0.3% in May.

Energy Index Sees Largest Drop in Six Years

Energy prices decreased 5.7% in June, marking their largest one-month decline since April 2020. From year-ago levels, though, the Energy Index is still up 15.7%, reflecting the surge in gas prices since the start of the Iran war. Gas prices dropped 9.7% during the month, while electricity prices edged down 0.1%. Utility prices rose 0.5%, following negative numbers since March.

“The report doesn’t bring any new news about oil prices,” Caldwell says, noting that the energy-driven decline in consumer prices was foreseeable, based on outside sources for energy data. Based on today’s market pricing, “the various futures markets still indicate that retail prices for fuel, gasoline, and other energy components of the CPI, but mainly gasoline, are likely to fall further in the coming months.”

Caldwell says “there could be a wide range of outcomes” as strikes in the Middle East resume. If the Strait of Hormuz closes for another month or two, prices could rise “considerably higher,” suggesting this could be a one-off scenario and inflation could surge, again putting downward pressure on consumer prices.

Core Inflation Flat

While much of the June data was in line with expectations, the unchanged month-over-month core inflation reading, which excludes volatile food and energy prices, was lower than most economists expected after six months of elevated numbers.

Core inflation fell because a wide range of categories—such as hotels, wireless bills, insurance, and housing—all cooled at the same time, according to Caldwell. “Core inflation in June was low in almost every major category,” he says. “We didn’t even get a larger pass-through of lower energy prices into core CPI in June.” He also sees airline prices continuing to recede as fuel cost worries subside, with prices up 0.2% in June and 27.0% year over year.

Bank of America economists note that the core services subset is facing headwinds due to worker shortages. “Aside from the energy story, the June CPI report still revealed pockets of inflationary pressure,” they wrote. “Shortages of immigrant workers have fueled price increases for home healthcare services, nursing care services, and daycare services that are outstripping other prices in the core CPI.”

Federal Reserve to Stay on Hold, for Now

June’s inflation report reduced bond market expectations for a rate hike at the July FOMC meeting, but expectations rose for at least one rate hike by the end of this year. Following the report’s release, bond market futures reflected a 42% chance that the Fed will raise rates by a quarter point by December, up from roughly 30% before the release.

Though the report signals good news on inflation overall, economists widely expect the Fed not to move on interest rates this month and remain on pause until policymakers are satisfied with the economy’s health, based on subsequent data releases. “At least one hike sometime in the remainder of 2026 is still the most probable case, unless the data continues to surprise heavily on the downside,” Caldwell says.

The Middle East conflict and its potential to put renewed pressure on energy prices could also affect the Fed’s decisions, according to Goldman Sachs’ Kay Haigh. “Although a path remains for rates to stay unchanged this year, the reescalation of the conflict has narrowed it,” he wrote.

Economists at Bank of America write: “June’s cooler-than-expected core CPI will likely keep the Fed on hold at its decision later this week. The Fed will need to see more cool inflation reports to hold off on raising rates in the second half of the year. June’s CPI report is a big step in the right direction, but more is needed.”