Inflation Cools to 3.5% but Fed Skeptical

Consumer Price Index data released this morning showed the annual rate of inflation has cooled to 3.5%, but the Federal Reserve remains focused on longer-term trends rather than a single monthly report. Headline CPI fell 0.4% for June, the largest monthly decline since April 2020, while the core measure, which strips out volatile food and energy costs, was flat on the month. Despite these encouraging figures, officials signaled that the cooling trend might not be enough to change their current policy stance.

The market reaction was muted. The S&P 500 and Nasdaq were higher, but the Dow Jones Industrial Average declined. Futures markets also suggested the central bank will not rush to cut rates, with the probability of a rate hike at the next meeting dropping to 12% from 42% the day before. Traders still see a higher than 50% chance of a hike by September.

The report highlighted a few specific areas where price pressures have eased. Shelter costs, which make up the largest portion of the CPI basket, rose just 0.1% against the typical 0.3% pace. Goods prices also slipped, and services were flat. However, much of the initial decline was attributed to a temporary drop in gasoline prices, which fell nearly 10% in June. That decline was linked to a ceasefire between the U.S. and Iran that has since collapsed, causing oil prices to climb again as of this afternoon.

Officials are wary of treating this as a definitive shift in the economy’s trajectory. Federal Reserve Chairman Kevin Warsh testified before the House Financial Services Committee shortly after the data dropped, repeating a message he has delivered for months. He called current inflation levels “too high” and emphasized that the central bank’s number one objective is to get monetary policy right. He described the current moment as a “hinge point in history,” where the goal is to restore price stability without creating unnecessary instability in the markets.

Warsh views the headline Personal Consumption Expenditures number as a “rough swag,” preferring the Dallas Fed’s trimmed mean measure. This metric filters out the kind of one-off volatility seen in today’s report. Officials are wary of treating this as a definitive shift in the economy’s trajectory. Federal Reserve Chairman Kevin Warsh testified before the House Financial Services Committee shortly after the data dropped, repeating a message he has delivered for months. He called current inflation levels “too high” and emphasized that the central bank’s number one objective is to get monetary policy right. He described the current moment as a “hinge point in history,” where the goal is to restore price stability without creating unnecessary instability in the markets.