A sharp retreat in gasoline prices drove US inflation to its slowest pace in three months, sending the dollar lower and pushing back expectations for a July rate hike.
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Dollar slides as June CPI cools more than expected to 3.5%
The dollar fell 0.3% Tuesday after a softer-than-expected June CPI report showed headline inflation slowed to 3.5%, down from 4.2% in May, as gasoline prices tumbled 9.7% from the prior month.
"After today's benign core inflation release, it appears less likely that the FOMC will raise rates over the next few meetings," said Jeffrey Roach, chief economist at LPL Financial. "However, we may still be at an inflection point, given the risk that the energy shock could spill over into other categories of consumer prices."
The ICE Dollar Index slid to 100.913, touching an intraday low of 100.607 immediately after the 8:30 a.m. release — its weakest level in more than a week. The Bloomberg Dollar Index fell 0.4% to 1,217.78. Treasury yields dropped across the curve, with the 2-year note down 7 basis points to 4.189% and the 10-year down 4 basis points to 4.571%. The S&P 500 rose 0.3% and the Nasdaq gained 0.6%.
The data gives Fed Chair Kevin Warsh breathing room as he begins two days of congressional testimony Tuesday. CME FedWatch showed an 83% probability of a rate hold at the July 28-29 meeting, up from roughly 60% before the release. But the reprieve may prove temporary — crude oil prices are climbing again after the US-Iran ceasefire collapsed and the Strait of Hormuz was effectively closed, threatening to reverse the June decline in energy costs.
Headline inflation undershot by a wide margin
The Consumer Price Index increased 3.5% in the 12 months through June, well below the 3.8% consensus estimate from economists polled by Reuters and the 4.2% reading in May. On a monthly basis, prices fell 0.4% — the largest one-month decline since the early months of the Covid-19 pandemic — compared with expectations for a 0.1% drop.
Excluding volatile food and energy components, core CPI rose 2.6% year-over-year, down from 2.9% in May and below the 2.8% consensus. Core prices were unchanged month-over-month after gaining 0.2% in each of the prior two months.
The pullback was driven almost entirely by energy. Gasoline prices fell 9.7% in June after surging in prior months as a fragile US-Iran ceasefire took hold in the Persian Gulf. Regular unleaded gasoline was still up more than 27% from a year earlier even with the monthly decline, according to AAA data.
"The headline number was helped by a large decrease in the price of energy during the month, and that's reversed itself this month," said Art Hogan, chief market strategist at B Riley Wealth. "Any concept of a July rate hike has been pushed down the road to later months."
The energy risk that won't go away
The ceasefire between the US and Iran collapsed this month after commercial tankers came under fire in the Strait of Hormuz, triggering US military strikes and a reinstated blockade of Iranian ships. President Trump said Monday he would impose a 20% toll on all cargo passing through the strait, a key chokepoint for about a fifth of global oil supply.
"We're probably maybe a week away from seeing the national average again hitting $4.00," said Patrick De Haan, an analyst at GasBuddy. "The CPI party from June is going to be crashed here I think for the month of July."
The last time headline CPI fell month-over-month was January 2026, when a similar energy-driven decline preceded two months of accelerating inflation. If history repeats, the June reprieve could be short-lived, keeping pressure on the Fed to maintain its hawkish posture.
For now, the data offers Warsh a more favorable backdrop for his Capitol Hill testimony. "The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds," said Skyler Weinand, chief investment officer at Regan Capital. "But almost every communication that has emanated from Chair Warsh during his short tenure so far has been hawkish."
The June CPI matched the 3.5% year-over-year increase in nominal wages reported by the Bureau of Labor Statistics last week, breaking a streak of declining real wages. That dynamic affects both lower- and middle-income households, putting pressure on budgets and consumer spending, said Nicole Bachaud, an economist at ZipRecruiter.
This article is for informational purposes only and does not constitute investment advice.
