U.S. inflation cools to 3.5 percent as gas prices drop sharply

Gasoline and other energy costs pulled U.S. inflation down in June, but the biggest monthly slowdown in more than four years came as the pause in fighting with Iran briefly eased pressure on oil and shipping markets. The Consumer Price Index for All Urban Consumers fell 0.4 percent from May, while the annual rate cooled to 3.5 percent from 4.2 percent, the Bureau of Labor Statistics said.

Energy prices fell 5.7 percent in June and were the largest contributor to the monthly decline. Gasoline prices dropped 9.7 percent from the prior month, shelter rose just 0.1 percent, transportation services fell 0.3 percent and food prices increased 0.2 percent. Core inflation, which strips out food and energy, was unchanged in June and slowed to 2.6 percent over the past 12 months. The all items index had not posted a larger one-month drop since April 2020, when it fell 0.8 percent.

The fresh reading was cooler than economists expected. Wall Street had been looking for a monthly decline of about 0.2 percent and an annual rate around 3.8 percent, a sign that forecasters were bracing for firmer price pressure than the government ultimately measured. The weaker-than-expected print gives the Federal Reserve more room to wait before changing rates, even as policymakers keep an eye on the energy market’s next move.

That caution matters because the same forces that helped cool June inflation could reverse quickly if tensions around the Strait of Hormuz flare again. Goldman Sachs analysts and other economists warned that renewed conflict could lift oil, shipping and insurance costs, feeding back into consumer prices after June’s temporary lull. Heather Long of Navy Federal Credit called the softer reading good news for the nation, the Federal Reserve and middle-income households that have been squeezed by higher borrowing costs and sticky prices.

The June data showed an economy still moving unevenly beneath the headline slowdown. Shelter remained one of the largest monthly gains, even if it rose only 0.1 percent, while the energy retreat did the heavy lifting in bringing the overall index down. With gas still averaging $3.86 a gallon on Tuesday, below May’s levels but above prewar prices, the latest relief looked real but fragile, tied more to geopolitics than to a lasting break in inflation pressure.