Inflation in the United States eased more sharply than expected last month, with prices rising 3.5% in the year to June – down from 4.2% in May – as the cost of energy and filling up at the pump fell, according to the Bureau of Labor Statistics. But the relief may be short-lived after fresh US military strikes on Iran this week sent oil prices soaring, with Brent crude jumping $10 in 24 hours to $87 a barrel.
“Energy prices plunged on the Iran ceasefire and memorandum of understanding,” said Scott Anderson, chief US economist at BMO Capital Markets. “But with fighting back on in the Gulf, the MOU in tatters, and energy prices heading higher again in July, the balance of risks remains more heavily weighted toward a rate hike at some point this year.”
“US inflation fell to 3.5% in June, but Middle East strikes push oil prices up, threatening a renewed surge.”
Kevin Warsh, chairman of the Federal Reserve, told Congress on Tuesday that the central bank had “no tolerance to persistently elevated inflation” and was committed to “restoring price stability” in the wake of the Middle East conflict. “Inflation’s a choice,” he said. “We monetary policymakers need to choose lower prices and that’s the commitment my colleagues have made.”
The BLS reported that gasoline prices fell 9.7% in June, but remain much higher than a year ago. Already, the national average has climbed back to $3.86 a gallon from $3.79 a week earlier, according to motorist group AAA. “Gasoline prices are already back above June levels, meaning the next inflation report will heat up again,” warned Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
President Trump, who pushed Warsh’s predecessor, Jerome Powell, to cut interest rates, has made clear he expects Warsh to deliver reductions in borrowing costs. The Fed held rates between 3.5% and 3.75% at Warsh’s first meeting in June. But Warsh stressed his independence to Congress, saying he had demonstrated his “commitment to independence” and that “my goal is for there to be no politics.”
Lindsay James, investment strategist at Quilter, said that despite Warsh having got his “feet under the table”, it did not “mean rate cuts are looming in order to appease President Trump. Instead, we are likely to see a conservative outlook from the Federal Reserve.”
The question hanging over the world’s largest economy is whether the ceasefire-turned-conflict will undo the recent progress on inflation – and force the Fed’s hand on rates.