US CPI falls for the first time since 2020, core gauge flat

U.S. consumer prices declined in June for the first time in six years and a key gauge of underlying inflation was little changed, taking some pressure off the Federal Reserve to raise interest rates.

The consumer price index fell 0.4% from May, dragged down by the biggest decline in gasoline prices since 2022, according to Bureau of Labor Statistics data out Tuesday. Excluding food and energy, the index was flat from the prior month.

The report suggests a slide in prices at the pump in June offered consumers some relief as the worst of the Iran war energy shock started to fade. Fed officials will likely welcome the data ahead of the U.S. central bank's upcoming meeting at the end of the month, though a new upturn in oil prices amid renewed hostilities between the U.S. and Iran risks prolonging the inflationary fallout from the conflict.

And while the monthly inflation figures were tame, annual gauges continued to point to elevated inflation: The headline index was up 3.5% from a year earlier and the core measure was 2.6% higher.

"This weakness will likely prove temporary and should fade as soon as next month's report," said Omair Sharif, president of Inflation Insights LLC. "This is welcome news for the Fed, but it is hardly mission accomplished."

The S&P 500 was higher following the report and Treasury yields fell. Investors scaled back bets on a Fed rate increase in July. Fed Chairman Kevin Warsh said in prepared remarks for testimony before Congress Tuesday that the central bank has "no tolerance" for persistently elevated inflation.

A services gauge that Fed officials watch closely, which strips out housing and energy costs, fell by 0.2%, matching the biggest decline since the onset of the pandemic. It was dragged down by outsize declines in motor vehicle insurance premiums, which also fell by the most since 2020, and communication services.

The core CPI was also restrained by monthly declines in goods prices, including those for apparel and used cars.

Gasoline prices fell nearly 10%, rents rose modestly and grocery prices advanced for a third month on increases in beef, eggs and dairy. Hotel rates, meanwhile, declined by the most in more than a year after four straight months of gains. Restaurant prices rose only modestly.

Computer software and accessories prices jumped 2.3% on the month and a record 17.4% from a year earlier. Minutes of the Fed's June 16-17 meeting released last week reflected growing concern among policymakers over inflation, including a scenario in which inflation remains elevated due to strong AI-driven demand, the Middle East conflict and President Donald Trump's tariffs.

A separate report Tuesday combined the inflation figures with recent wage data. Thanks to the drop in gasoline prices, Americans saw real average hourly earnings rise 0.1% from a year earlier after declines in the prior two months.

The combination of higher prices and weaker pay increases has been putting more stress on household budgets ahead of November's midterm elections, at a time when the University of Michigan's gauge of consumer sentiment has only just started to recover from record lows.

The Fed's preferred measure of inflation, the personal consumption expenditures price index, doesn't put as much weight on rents as the CPI. Figures on producer prices due Wednesday will offer insights on additional categories that feed directly into the PCE index, which will be released later this month.

Some economists have warned that higher fertilizer and transportation costs will take longer to trickle down to food and consumer prices, with the full fallout from the war yet to materialize. And the recent flare-up in the Middle East could add further pressure to prices in the months to come.

"With supply chain constraints coming up again, I will say it creates an inflation problem for the end of this year, maybe early next year," said Pooja Sriram, senior U.S. economist at Barclays. "So while 2026 may not see as much of an imprint, I think it poses a risk to 2027, especially core inflation when you think about the pass-through effects."

(With assistance from Julia Fanzeres, Augusta Saraiva, Jeffrey B. Sparshott and Ye Xie.)

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