US inflation cools to 3.5% in June as energy prices drop

US inflation cooled more than forecast in June as energy prices tumbled, giving the Federal Reserve room to hold rates steady and fueling a rebound in risk assets including Bitcoin.

"The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds," Skyler Weinand, chief investment officer at Regan Capital, said.

The consumer price index fell 0.4% from May, the largest monthly decline since the early pandemic, the Bureau of Labor Statistics reported Tuesday. Core CPI, which excludes food and energy, was flat month over month — below the 0.2% increase economists had projected. On an annual basis, core inflation stood at 2.6%, down from 2.8% in May and below the 2.8% consensus estimate.

The data gives Chair Kevin Warsh cover to maintain the Fed's wait-and-see posture at the July 28-29 FOMC meeting. CME FedWatch data showed an 83% probability of a rate hold after the report, up from roughly 60% before the release. Still, with the ceasefire between the US and Iran unraveling and crude oil prices climbing back, the reprieve may prove temporary.

Energy prices fell 5.7% over the month, with gasoline dropping 9.7% — the first monthly decline since the start of the year. A gallon of regular gas at the end of June was 71 cents lower than its May peak, according to AAA. On a year-over-year basis, energy prices rose 15.7%, down sharply from the 23.5% annual increase recorded in May. Gasoline was up 26.7% from a year earlier, compared with 40.5% in the prior month.

The moderation in headline inflation brought the annual rate back in line with nominal wage growth. The Bureau of Labor Statistics reported last week that average hourly earnings rose 3.5% year over year in June, ending a streak of declining real wages. Nicole Bachaud, an economist at ZipRecruiter, said inflation outpacing wage growth has put pressure on both lower- and middle-income households, affecting how they interact with the economy.

Despite the improvement in the national average, lower-income households continue to feel the pinch. Data from Numerator's Consumer Goods Price Index showed prices for everyday household purchases rose 0.70% in June, accelerating from 0.51% in May and 0.44% in April. Over the past 12 months, everyday goods inflation stood at 3.4%. Since January 2018, prices for low-income consumers have increased 35.7%, compared with the national average of 33.8%, Numerator said.

Bitcoin Rebounds as Rate-Hike Odds Fade

Bitcoin climbed toward $65,000 following the data release, recovering from recent losses as softer inflation reduced expectations for further monetary tightening. The S&P 500 and the Nasdaq also rose, though the Dow was pressured by a 20% slide in IBM stock. The cross-asset rally reflected a broad repricing of rate expectations: traders shifted from pricing a roughly 40% chance of a hike before the report to an 83% probability of a hold.

Temporary Relief or Lasting Trend?

The June data may represent only a temporary reprieve. The ceasefire between the US and Iran ended this month, Iran claimed the Strait of Hormuz was once again closed, and the US military announced it would reinstate its blockade of Iranian ships. President Trump said Monday he would impose a 20% toll on all cargo passing through the strait. Patrick De Haan, an analyst at GasBuddy, said the national average gas price could hit $4 a gallon again within a week.

"We're probably maybe a week away from seeing the national average again hitting $4," De Haan said.

The last time inflation fell this sharply was during the early pandemic demand collapse. The current trajectory depends on whether energy prices resume their climb — a risk that has already materialized in July. With the FOMC meeting less than two weeks away, the June CPI report gives policymakers breathing room — but the July data, which will capture the renewed energy shock, could tell a different story.

This article is for informational purposes only and does not constitute investment advice.