US stocks rise after inflation cools to 3.5% in June

A softer-than-expected inflation report helped U.S. stocks rebound on Tuesday as the Bureau of Labor Statistics said consumer prices fell 0.4% in June from May and rose 3.5% from a year earlier. The monthly decline was the largest since April 2020, and it came in below economists’ expectations for a 0.2% decline and 3.8% annual inflation.

The biggest force behind the slowdown was energy. The BLS said energy prices fell 5.7% in June, making gasoline and other fuel costs the main source of relief for households and the clearest reason markets cheered the data. But the picture was less encouraging underneath that headline. Food prices rose 0.2% for the month, including food at home and food away from home, and core CPI, which strips out food and energy, was unchanged. That split helps explain why cheaper gas can brighten sentiment even when many families still feel pressure at the checkout counter.

Other categories moved lower, including motor vehicle insurance, communication, apparel, medical care, and used cars and trucks. Even so, the report reinforced the gap between what is helping consumers now and what still feels sticky. Lower fuel costs can show up quickly in monthly budgets, while food and other recurring expenses keep households under strain.

Wall Street responded immediately. Stock futures were mostly positive after the release, Treasury yields fell sharply, and the S&P 500 and Nasdaq later closed higher. The Dow’s advance was more muted because IBM weighed on the index. The market reaction showed how closely investors are watching inflation for clues about whether the Federal Reserve can move toward rate cuts without waiting for a deeper slowdown.

That question was sharpened by Chairman Kevin Warsh’s appearance on Capitol Hill the same day, when he delivered his semiannual monetary-policy testimony before the House Financial Services Committee. The Fed’s posture remained cautious, even as the inflation data gave markets a reason to test the idea that the worst of the price surge may be behind them.

The June reading may prove important if it marks the start of a longer cooling trend, but the relief is still vulnerable. Another run-up in oil prices or a worsening of Middle East tensions could quickly reverse some of the progress that sent stocks higher and borrowing costs lower.