Analysed by Tiffany Wilding
Both headline and core CPI inflation came in lower than expected in June. Headline CPI fell by 0.4 per cent month-on-month, bringing the year-on-year rate down to 3.5 per cent, as a fall of approximately 10 per cent in energy prices combined with unexpectedly subdued core inflation. Core CPI remained unchanged over the month.
What does this mean?
It is important to note that the details of the report were encouraging beyond the energy-driven fall in headline inflation. Both goods and services inflation were more moderate, suggesting that the moderation was widespread and not concentrated in a small number of volatile categories. The continued slowdown in housing inflation remains consistent with weaker housing market fundamentals and supports our expectation that housing inflation will eventually settle below its pre-pandemic pace. More broadly, the report supports our long-standing view that inflation will moderate over the remainder of the year as various temporary factors that drove inflation over the past year begin to fade.
Evidence of cost-pass-through related to AI remained mixed. Categories where we would expect pressure stemming from high memory and semiconductor prices showed divergent results. Mobile phones and computers recorded moderate price readings. By contrast, the software category, which includes products such as USB sticks, remained firm, rising by 2.3 per cent month-on-month. This outcome highlights an important distinction: AI-related price pressures remain concentrated in a small set of technology categories, rather than spreading to more generalised inflation. In the next PCE report, software inflation will once again contribute more to the PCE than to the CPI due to its higher weighting. However, methodological revisions by the Bureau of Economic Analysis (BEA), due later this year, are expected to substantially reduce this category’s contribution to inflation.
Inflation in travel-related services was also, on balance, more moderate, benefiting from lower energy costs. Airfares remained unchanged following the significant increases (25 per cent) recorded at the start of the year, linked to rising fuel costs. We expect further moderation provided that oil prices do not return to the highs reached during the war with Iran. A notable exception was the category of event tickets, where demand linked to the World Cup appears to have exerted some upward pressure. However, the broader picture for travel-related services points to a continuation of the disinflationary trend.
What next?
A more moderate-than-expected CPI figure provides significant relief. Whilst today’s report will not entirely put an end to the debate over further monetary policy tightening, it should effectively rule out a rate rise in July. The report provides greater confidence that inflation is moving in the right direction and supports the Federal Reserve’s ability to remain patient. Whilst it is unlikely that monetary policy makers will attach disproportionate weight to a single CPI figure, the combination of more moderate goods inflation, continued disinflation in the housing sector and moderating inflation in travel-related services reduces concerns that the recent strength in the PCE was signalling a renewed inflation problem. Overall, monetary policy makers will continue to monitor incoming data closely. However, today’s report represents an important step towards validating the view that inflation will moderate in the second half of the year and further supports our expectation that the Federal Reserve will keep rates on hold throughout 2026.
