US inflation falls sharply in June but Iran conflict threatens progress

US consumer prices fell 0.4% in June, the first monthly decline in six years, driven by a sharp drop in gasoline prices as tensions with Iran briefly eased. The annual inflation rate slowed to 3.5% from 4.2% in May, undershooting economist expectations Source: CNN. However, the relief may be short-lived as hostilities resumed, pushing oil prices back up.

The data

The Consumer Price Index (CPI) dropped 0.4% month-over-month, the largest monthly decline since April 2020 Source: Infobae. Core inflation, excluding food and energy, was flat for the month and rose 2.6% year-over-year, down from 2.9% Source: La Republica. Energy prices fell 5.7%, accounting for more than 100% of the overall decline Source: CNN.

The outlook

The ceasefire between the US and Iran collapsed last week, leading to renewed airstrikes and a naval blockade in the Strait of Hormuz. Brent crude surged 4.6% to $87.13 on Tuesday Source: Infobae. Analysts warn that the inflation progress is fragile. "The resumption of hostilities in Iran means the possibility of rate hikes is far from over," said Kay Haigh of Goldman Sachs Asset Management Source: La Republica.

Fed divided

Federal Reserve Chair Kevin Warsh testified before Congress on Tuesday, reiterating the Fed's commitment to controlling inflation. "We have zero tolerance for high inflation," he said in prepared remarks Source: Infobae. Minutes from the June Fed meeting reveal deep divisions: about half of policymakers support a rate hike before year-end, while the other half prefer to wait Source: Listin Diario. Markets now see a 20% chance of a hike in July Source: La Republica.