The overall CPI in the United States cooled off in June, with core inflation unexpectedly remaining stable. However, oil prices rebounded and tensions in the Middle East have raised doubts about further interest rate hikes.

Data released by the U.S. Department of Labor on Tuesday showed that the Consumer Price Index (CPI) in June was lower than expected, with the largest monthly decline in over six years on a month-on-month basis and a significant slowdown in year-on-year growth. This performance has raised hopes in the market for a marginal easing of inflationary pressure, but the prospect of a rate hike by the Federal Reserve this year has not been eliminated due to the rapid rebound in energy prices as a result of escalating geopolitical conflicts in the Middle East. The data showed that the seasonally adjusted CPI in the U.S. fell by 0.4% in June, much lower than the expected decline of 0.2% by economists, marking the largest monthly drop since April 2020. The year-on-year increase also slowed significantly from 4.2% in May to 3.5%, lower than the market's expected 3.8%. The main driver of the cooling inflation was the sharp drop in energy prices. The energy price index plummeted by 5.7% in that month, with gasoline and fuel prices both dropping by over 9%. Due to a fragile ceasefire reached between the U.S. and Iran last month, gas station prices dropped from multi-year highs, providing consumers with a rare breathing space. However, this positive development is quickly fading - after a commercial vessel attack incident in the Strait of Hormuz last week, the ceasefire agreement collapsed, leading to renewed military strikes between the U.S. and Iran, with President Trump subsequently announcing a renewed naval blockade against Iran. As a result, international oil prices surged to a four-week high, and data from the American Automobile Association (AAA) also showed that the average gas price in the U.S. had risen from $3.79 per gallon a week ago to $3.86. Heather Long, Chief Economist at Navy Federal Credit Union, said, "June finally brought some relief in terms of inflation. This eases the pressure on the Federal Reserve, allowing the central bank to wait and see. However, it is worrisome that this relief may be short-lived, especially as tensions escalate with Iran. The outcome of the current inflation trend remains uncertain." Unexpectedly, the core inflation remained flat, with service and commodity prices cooling in multiple areas. Excluding the volatile food and energy prices, the core CPI in June remained flat compared to market expectations of a 0.2% increase; the year-on-year increase fell from 2.9% in May to 2.6%, returning to a relatively moderate range, and lower than the expected 2.9%. Looking at specific items, the service costs that the Federal Reserve policymakers closely monitor to reflect long-term inflation trends also slowed significantly. After excluding energy costs, service prices remained flat, housing costs rose slightly by 0.1%, and transportation service prices fell by 0.3%. It is worth noting that hotel accommodation prices recorded the largest drop in over a year in June after rising for four consecutive months. Despite speculations from economists that the traveling demand brought by the FIFA World Cup held in eleven U.S. cities might have pushed up accommodation costs, actual data did not confirm this concern, as restaurant prices rose only slightly during the same period. Regarding commodities, clothing prices, which are sensitive to energy costs and tariff changes, fell by 0.6%, used car prices dropped by 0.2%, new car prices remained flat, and car insurance costs significantly decreased. Food prices continued to rise moderately, with a 0.2% increase on a month-to-month basis, and beef, eggs, and dairy products continued to push up supermarket consumption costs. In the midst of a general moderation, computer software and accessories prices defied the trend by rising significantly, with a 2.3% increase on a month-on-month basis and a record-high 17.4% year-on-year increase, reflecting the strong demand driven by artificial intelligence (AI) in certain sectors providing price support. The Federal Reserve maintains a hawkish stance, with the market betting on a rate hike in September Although the inflation data brought positive signals, they are far from enough to make Federal Reserve officials confident enough to shift towards easing. Federal Reserve Chairman Kevin Wash explicitly stated in his prepared testimony to the House Financial Services Committee that there is "zero tolerance" for sustained high inflation, and "the Federal Reserve's primary goal is to formulate a reasonable monetary policy, and this is the direction we have always adhered to. As long as policy is implemented, the high inflation in the past five years will eventually become history." Federal Reserve Governor Christopher Waller also emphasized earlier that several months of good inflation data are needed to convince him that prices are steadily falling towards the 2% target. Minutes from the June interest rate meeting released last week showed that policymakers' concerns about inflation are deepening, especially with regards to the continuing high inflation scenario created by strong AI-related demand, Middle East conflicts, and the tariff policy of the Trump administration. Currently, the Federal Reserve maintains the benchmark interest rate unchanged in the range of 3.50% to 3.75%. Market pricing shows that the Federal Reserve is almost certain to maintain the status quo at its meeting on the 28th and 29th of this month. Following the release of the CPI data, investors reduced their bets on a rate hike in July, with most U.S. stock index futures rising and U.S. bond yields dropping significantly. However, expectations of a rate hike in September on the 15th and 16th policy meeting have not been eliminated. According to the FedWatch tool from the Chicago Mercantile Exchange, the market's pricing of a 25 basis point rate hike in September remains slightly higher than fifty percent.