For the first time since January, the annual inflation rate pulled back.
What made the difference? Energy - specifically gasoline and fuel oil. From May to June, consumer prices dropped 0.4% overall, the largest one-month decline since April 2020. The energy index was the primary driver of that drop, according to the BLS, "more than offsetting" increases in other categories.
The story behind that drop is a ceasefire. In mid-June, the US and Iran paused their conflict, and global oil prices fell hard. At the start of June, a barrel of oil cost more than $90.
By the end of the month, it was roughly $73. The broader energy category fell 6%.
But it is still early to celebrate.
The ceasefire appears increasingly fractured. On Tuesday, for the third straight day, the U.S. and Iran engaged in hostile exchanges. By Tuesday morning at 9:45 a.m. ET, oil prices had climbed to around $86 per barrel.
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The energy drop was the headline, but other parts of the inflation report tell a different story.
In June, the cost of used cars and trucks fell by 0.2%, resulting in a yearly drop of roughly 2%. Beef roasts have risen roughly 14% compared to a year ago, due to cattle supplies hitting multi-decade lows. Tomato prices have climbed 20% over the past year due to tariffs and unfavorable weather, though they have started to dip recently.
So the overall inflation number improved, but the picture underneath is still messy. Energy gave the big break, while food and some other goods kept climbing.
The temporary ceasefire did more than lower gas prices. It gave economists room to hope.
Mark Zandi, chief economist at Moody's, said, "It suggests the worst is over, we're past the peak and inflation should moderate." As Wells Fargo's chief economist Tom Porcelli put it, "We think inflation will continue the process of slowing down over the coming year. We don't see a compelling reason at this point for the Fed to raise rates."
The catch: The ceasefire appears increasingly fractured. As of Tuesday morning, July 14, oil was back up to about $86 per barrel after renewed hostilities between the US and Iran. A note from Goldman Sachs Research stated that "a serious re-escalation of the conflict would threaten to revive the key upside risk to inflation and raise the odds of rate hikes."
Zandi put it bluntly: "The biggest threat is that things unravel and we're back to full-blown war with the Strait [of Hormuz] shut down."
June was a reprieve. Whether it becomes a trend depends entirely on whether the ceasefire holds or collapses.
If tensions stay calm and inflation keeps slowing, the Fed is likely to keep from raising borrowing costs. That is good news for stocks and bonds, especially after a year where rate hikes were a constant worry. If the conflict escalates, oil could jump again, inflation could tick up, and the Fed might have to raise rates - a move that tends to hit growth stocks and long-term bonds hardest.
For investors, the takeaway is not to panic either way. Watch the news from the Middle East and oil prices. And remember that one good month does not break a trend - but one bad month does not start one either.
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