The brief US-Iran ceasefire that brought energy prices down has ended, and fresh military strikes have sent oil prices surging again, threatening to reverse the relief. Inflation in the US eased to an annual rate of 3.5% in June, down from 4.2% in May, according to the Bureau of Labor Statistics. Month-over-month, the consumer price index fell 0.8%, the largest one-month decrease since April 2020, driven by a 9.7% drop in gasoline prices and a 9.2% decline in fuel oil. Core inflation, which excludes volatile food and energy, slipped to 2.6% on a yearly basis.
But the reprieve may be short-lived. Fresh US strikes on Iran this week caused the price of Brent crude to jump $10 in 24 hours to $87 a barrel. Donald Trump said on Monday that the Strait of Hormuz, through which a fifth of the world’s oil passes, will remain open “with or without Iran” and claimed the US will reinstate its blockade of Iranian ports. The national average price for a regular gallon of gas rose to $3.87 last week, 70 cents more than a year ago, according to AAA. Delta said in its quarterly earnings that it expects high airfares to last, passing on 60% of its extra fuel costs to consumers.
“US inflation fell to 3.5% in June but fresh strikes on Iran risk reversing the drop.”
Kevin Warsh, chairman of the Federal Reserve, told Congress he had “no tolerance to persistently elevated inflation” and was committed to “restoring price stability”. “Inflation’s a choice,” he said. “We monetary policymakers need to choose lower prices and that’s the commitment my colleagues have made.” The Fed held interest rates between 3.5% and 3.75% at Warsh’s first meeting in June. Analysts suggest inflation could rise again, which may force the Fed to hold or raise rates. “Energy prices plunged on the Iran ceasefire and memorandum of understanding, 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,” said Scott Anderson, chief US economist at BMO Capital Markets. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted: “Gasoline prices are already back above June levels, meaning the next inflation report will heat up again.”
Despite Trump’s expectation of rate cuts, Warsh stressed his “commitment to independence”. Lindsay James, investment strategist at Quilter, said it did not “mean rate cuts are looming in order to appease President Trump”. The question now is whether the Federal Reserve can tame inflation without cooling the economy – and whether the White House will let it.