Oil prices have crashed, and the CPI has fallen: Will the US June CPI change the Federal Reserve’s path?

On the evening of July 14 (Beijing time), the U.S. Bureau of Labor Statistics (BLS) will release the June CPI data. The market currently expects June CPI year-over-year to fall from the prior 4.2% to 3.8%, with May likely already having become the peak of this year’s overall inflation. Month-over-month, it may show negative growth (-0.1%), the largest month-on-month decline since April 2020.

The core driver of the decline in overall inflation is that after the interim Israel–Iran peace agreement was signed in mid-June, international oil prices fell rapidly, and U.S. gasoline retail prices dropped by more than 15% over the course of a month. This is expected to bring down overall CPI by about 0.4 percentage points. Meanwhile, food prices remain stable, housing inflation continues to slow, and the overall inflation cooling effect is evident.

Although negative month-over-month growth in overall CPI will largely ease market panic about inflation getting out of control, this round of inflation improvement reflects more of a superficial cooldown driven by the pullback in energy prices. Core CPI may still maintain month-over-month growth of more than 0.2%, while the year-over-year figure would only ease slightly to 2.8%. In addition, due to differences in weighting (for example, housing has a lower weight while financial services and software have higher weights), the Fed’s more closely watched core PCE performance may be stronger than core CPI; month-over-month, it could remain around 0.28% and not improve in sync.

What’s truly worth paying attention to is that core inflation has started to become “stickier” again

That is to say, although overall CPI is cooling, the decline reflects more of short-term oil price volatility. The U.S. underlying inflation pressure still shows strong resilience. If core data continues to stay at elevated levels, even if overall CPI falls significantly, it will be difficult to change the Fed’s view that inflation risks have not yet been resolved. But if core CPI comes in below expectations, market expectations for Fed rate hikes would cool markedly, and there is a risk of reversal for rate-hike trading.