Consumer prices rebounded in June due to lower energy and gasoline prices, but reversed after rising sharply in recent months in the wake of the Iran war. But economists said there was a risk that inflation could flare up again in the coming months amid renewed hostilities between the United States and Iran.
The Consumer Price Index, a barometer of inflation, rose 3.5% in June compared to 12 months earlier, the Bureau of Labor Statistics said Tuesday.
This is down from 4.2% in May and the first decline in annual inflation since January’s 2.4%.
“This suggests that the worst is behind us, the peak is behind us and inflation should moderate,” said Mark Zandi, chief economist at Moody’s.
“The biggest threat is that things unravel and the Strait of Hormuz is closed and we go back to a full-scale war,” he said.
If that happens, interest rates may rise. Inflation is one of the economic indicators that the Federal Reserve uses to guide interest rate decisions. Ahead of the latest CPI data, U.S. central bank policymakers had recently indicated that raising borrowing costs could be considered in an effort to rein in inflation. The Fed aims to keep annual inflation at around 2% over the long term.
Economists said that absent new tensions, inflation should moderate and the Fed is unlikely to raise borrowing costs.
“We think inflation will continue its slowing trajectory next year,” said Tom Porcelli, chief economist at Wells Fargo. “We don’t see any compelling reason for the Fed to raise rates at this point.”
US-Iran escalation could reignite inflation
The United States and Iran reached a temporary ceasefire agreement in mid-June, seeking to end the conflict that erupted when the United States and Israel bombed Iran on February 28.
world crude oil prices It declined significantly throughout June, falling from more than $90 per barrel to about $73 per barrel by the end of the month.
As a result, prices for gasoline and other fuels and energy products refined from crude oil have fallen significantly.
Gasoline prices fell about 10% in June, fuel oil fell 9% and the broader energy category fell 6%, according to inflation data released Tuesday. However, they have increased by double digits over the past year by 27%, 43%, and 16%, respectively.
Because energy and fuel are major cost inputs for businesses (e.g., fuel to power planes or transport food to grocery stores), consumers are seeing varying degrees of price increases elsewhere.
June’s price moratorium may not last long amid rising tensions in the Middle East.
A ceasefire agreement between the United States and Iran looks increasingly unraveling after the adversaries exchanged hostilities for a third consecutive day on Tuesday. Global oil prices rose to about $86 per barrel as of 9:45 a.m. ET on Tuesday.
“A serious re-escalation of the dispute could re-introduce important upside risks to inflation and increase the likelihood of rate hikes,” Goldman Sachs Research said in a note on Sunday.
Largest single-month decline since April 2020
Overall, the consumer price index fell 0.4% on a monthly basis in June, the largest single-month decline since April 2020, when the COVID-19 pandemic began, BLS said.
The BLS said the energy index contributed most to the decline, “more than offsetting” increases in other indexes such as housing and food.
But there were declines elsewhere as well.
New car prices remained stable throughout the month. Zandi said used car and truck prices fell 0.2% in June, bringing the annual decline to about 2%, likely due to weak consumer demand due to concerns about car affordability.
Zandi said prices for clothing and electricity also fell “significantly” during the month, while medical services prices also fell and house prices “barely rose.”
However, he does not expect all these trends to continue, explaining that some of the price weakness is due to data “anomalies” that can occur from time to time in the CPI report.
In fact, certain categories within the broader CPI report can spike or fall amid various supply and demand issues.
For example, the price of roast beef has increased about 14% in the past year, even though beef supplies have been depressed for decades. Tariffs and bad weather also pushed tomato prices up 20% last year, but prices have recently begun to fall.
After all, “there are a lot of forces at play that should bring inflation back on target unless the war gets back on track,” Zandi said.
