The US CPI may have reached an inflection point in June, but the US-Iran conflict disrupted the situation, and expectations of the Federal Reserve's interest rate hike this year have not been resolved

The Zhitong Finance App notes that tonight the US will release the June CPI data. Consumer inflation may slow down in June, but this may not bring much comfort to families, nor can it rule out the possibility that the Federal Reserve will raise interest rates this year, because the Middle East conflict is still unresolved.

The slowdown in consumer price index (CPI) expectations mainly reflects a fall in gasoline prices from years of high levels, as the fragile cease-fire agreement between the US and Iran came into effect last month. However, a commercial tanker was attacked in the Strait of Hormuz last week, triggering a military attack between the US and Iran. The truce was later declared broken.

Affected by this, gasoline prices have moved upward. The national average gasoline price rose to $3.87 per gallon Monday from $3.80 a week earlier, according to data from the automotive advocacy group AAA. US President Trump said on Monday that the US will resume the blockade of Iranian shipping within the Strait of Hormuz. The strait is a key channel for global oil supply and has now become one of the main battlefields of this conflict.

“The pain index has only dropped from 10 to 9, and consumers are still in a very difficult situation,” said Brian Behun, professor of economics at Boston College. We're not out of trouble yet.”

A survey of economists predicts that the Bureau of Labor Statistics under the US Department of Labor may report on Tuesday that the consumer price index (CPI) is still at a high level of 3.8% for the 12 months to June.

The predicted values ranged from a low of 3.6% to a high of 4.0%. CPI surged 4.2% year over year in May, the biggest year-on-year increase since April 2023, and economists think this may already be the peak.

The Federal Reserve tracks the personal consumption expenditure (PCE) price index to meet its 2% inflation target. The last time inflation fell below 2% was in early 2021. The minutes of the US Federal Reserve's June 16-17 meeting released last week showed that policymakers' concerns about inflation increased in the last month.

The Federal Reserve kept the benchmark interest rate unchanged in the range of 3.50% to 3.75% at the June meeting, but new forecasts show that policymakers' intention to raise interest rates in 2026 is growing.

According to CME's FedWatch tool, financial markets expect the possibility that the Federal Reserve will raise borrowing costs at the September 15-16 policy meeting to be about 50.8%.

Consumer prices are expected to fall 0.1% month-on-month in June, which will be the first monthly decline since May 2020, and increased 0.5% month-on-month in May.

Diane Swank, KPMG's chief economist, said: “Prices are still rising rapidly. Even if some grocery stores claim to lower prices to attract people back, this probably won't lower their overall expenses because there are other factors. People are still struggling to keep up with prices.”

According to data from the US Energy Information Administration (EIA), the average price of gasoline fell from $4.61 per gallon in May to $4.18, and the May level was the highest since July 2022. Today's oil prices are still far above pre-war levels. The moderate relief in gasoline prices at pumping stations may be offset by the expected rise in food prices following a slight increase in May.

Food prices may rise

Economists say the war between the US, Israel and Iran has boosted fertilizer prices and delivery costs. Coupled with dry weather in parts of the country, it is likely to push up food prices later this year and beyond 2027.

After deducting volatile food and energy components, the core CPI is expected to increase 2.8% year over year in June compared to 2.9% in May. The so-called core CPI is expected to grow 0.2% month-on-month, in line with the May increase.

Some economists see a moderate increase in core CPI as a positive sign. Although renewed fighting between the US and Iran has boosted oil prices, oil prices are still below the level reached in late April and early May.

Andrew Hollenhorst, Citigroup's chief economist in the US, said, “For Federal Reserve officials, the most important thing is core inflation that is not directly affected by oil prices. One previous concern was that higher energy costs would 'transfer' to core inflation, but apart from ticket prices being slightly stronger (which should now reverse), higher oil prices did not significantly boost core inflation.”

Other economists, however, are less optimistic. They believe that moderate core CPI data indicates that potential inflation is sticky, which will keep expectations of this year's rate hikes under consideration. They pointed to the still high input prices and longer supplier delivery times in commercial surveys. Producer price data also suggests that price increases are imminent.

In June, the monthly core CPI is expected to be driven by rising service and hotel room prices in connection with the FIFA World Cup. Auto insurance is expected to rebound after May recorded its biggest decline since October 2020.

Airline prices and rents are expected to rise moderately. Inflation of core commodities is likely to be flat month-on-month. Economists say that Apple's price increase at the end of June may be reflected in the July data. They believe that the transmission effect of tariffs is weakening, although clothing prices may have risen and household furniture prices have rebounded.

Samuel Toombs, chief economist at Pantheon Macroeconomics UK and the US, said: “The June CPI report is unlikely to clearly favor or rule out the possibility of the Federal Reserve tightening policy this year.”