The US Consumer Price Index (CPI) changed direction on Tuesday, as the June report showed that inflation fell to 3.5% on a year-to-year basis. This was sharply lower than the 4.2% gain in May and below the market estimate of 3.8%. Inflation had risen sharply in recent months stand the June reading was the first decrease in inflation since February.
On a monthly basis, CPI came in at -0.4%, sharply lower than the 0.5% gain in May and below the market estimate of -0.1%. This marked the largest monthly drop in four years, according to the US Labor Department.
Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, also declined significantly. The core rate climbed 2.6% year-on-year, down from 2.9% in May, and just below the market estimate of 2.8%. Monthly, core CPI was unchanged, below the 0.2% gain in May, which was also the market estimate.
The surprisingly low inflation report was driven by lower prices for gasoline, clothing and used cars. Energy prices plunged due to the ceasefire between Iran and the US, but fighting has again resumed, which likely will mean higher energy prices and a rise in inflation.
Fed Gets Breathing Room on Rate Hikes — For Now
The markets reacted positively to the lower-than-expected inflation report, with the probability of a rate hike at the Federal Reserve’s meeting later this month falling to 15%, compared to 42% prior to the meeting, according to CME’s Fed Tool. Still, let’s keep in mind that inflation remains well above the Fed’s target rate of 2% and rate hikes are certainly a possibility in the second half of the year, even with this softer-than-expected inflation report. Tuesday’s positive inflation report may have been a “one off” event, especially if the situation escalates in the Persian Gulf.
US Dollar Drops, Stock Market Higher after Inflation Report
The US dollar retreated against all the majors on Tuesday, as the likelihood of a rate hike later in July has fallen sharply following the soft inflation report.
The EUR/USD currency pair rose 0.36% on Tuesday and closed at 1.1421. The risk currencies showed sharp gains, as NZD/USD jumped 1.05% and closed at 0.5810, while AUD/USD climbed 0.82% and settled at 0.6974.
The US stock market posted gains on Tuesday in reaction to the inflation report.
The tech-heavy Nasdaq 100 Index was sharply higher, climbing 322.18 points (1.1%) and closed at 29,586.29.
The S&P 500 Index recorded more moderate gains, rising 28.25 points (0.38%) and closed at 7543.59.
We hope you enjoyed reading this analysis of the latest US CPI data release. If you want to trade it, check out our list of the best Forex brokers.