US CPI: A lot softer in June
Almost all categories undershot expectations in the June CPI, continuing to a notable step down in both headline and core price growth measures.
The former slipped from 4.2% to 3.5% YoY, while the latter fell from 2.9% to 2.6%, despite plenty of analysts looking for core inflation to print unchanged relative to May. This data is, without a doubt, unambiguously dovish for the Fed, coming after both Waller and Williams sounded hawkish notes in recent days. That has put a substantial damper on the dollar, too, seeing the DXY index fall sharply post-release as traders pare back Fed hiking bets for the second half of the year.
Admittedly, given the magnitude of today’s downside miss, we are a little surprised not to see a larger FX reaction.
Still, two factors have likely muddy the waters on this occasion. First, Fed Chair Kevin Warsh’s concurrent testimony to Congress has offered a more hawkish tone than justified by these latest figures, though these comments would have been assembled prior to the June CPI data being published. Second, and we think more significantly, escalating tensions in the Middle East have once again boiled over in the past week, re-closing the Strait of Hormuz to maritime tariff and sending WTI prices back above $80 per barrel as of writing. This leaves the June data looking more than a little dated, with risks skewed firmly to the upside if hostilities continue to drag on. So, while June CPI offers a convincing signal that underlying inflation remains subdued, the rate of forward-looking price growth remains in hock to geopolitics, limiting the implications stemming from prior numbers.
Still, we think there are some conclusions worth drawing. It is no surprise to see gasoline fall sharply, down almost 10% MoM, given June coincided with a ceasefire agreement that saw crude oil prices fall to near pre-war levels.
More interestingly, this was accompanied by broad softness across other components too. Apparel prices declined -0.6% MoM, used car inflation landed at -0.2% in June, while shelter costs rose just 0.1% last month after a 0.3% increase in May. While garnering less attention under the Fed’s new leadership, supercore price growth landed at -0.2% MoM in June, down from 0.3% previously. In any case, this looks to be a general easing of inflation pressures, not just an energy-driven reversal.
One final word of caution is that June should have coincided with the unwind of some tariff impacts, which in turn would bias price growth readings to the downside.
That does not, however, diminish the dovish implications of today’s numbers. If higher tariffs warrant a relatively tighter policy stance, all else being equal, that same argument also works in reverse. We continue to call for no rate cuts from the Fed in 2026, subject to the present Middle East tensions cooling and oil prices remaining contained. That poses a downside risk to the dollar, with markets still pricing 32bps of 2026 Fed tightening even after this latest data release. Granted, this is down 10bps relative to earlier in the day, explaining a 0.5% DXY decline, but our unchanged Fed call points to further downside dollar risk stemming from policy rate expectations.