June CPI Comes in at 3.5%, Crushing 3.8% Forecast

This is the number the bulls needed. June CPI landed at 3.5% year-over-year against a 3.8% consensus, and the month-over-month print was a stunning -0.4% versus the -0.1% expected. The prior month was +0.5%. That's a massive swing, and markets felt it instantly.

Energy did the heavy lifting. The energy index cratered 5.7% in June — the biggest monthly drop since April 2020 — with gasoline alone down 9.7%. That's your headline number right there. But the real story is core. Core CPI came in flat on the month (0.0% vs. +0.2% expected) and 2.6% year-over-year versus 2.8% expected. Flat core is the softest reading since January 2021. Shelter rose just 0.1% — also a four-year low. The housing disinflation trade is finally showing up in the data.

Read more Australia Business Mood Rebounds, But Oil Spike Clouds the Data →

Fed funds futures repriced fast. Before the report, markets were pricing about 9.2 basis points of hikes at the July 29 FOMC meeting and 41 bps by year-end. After the print, those figures collapsed to roughly 3.9 bps for July and 32.7 bps through December. The Fed now has legitimate cover to look past the 3.5% headline and anchor on the 2.6% core trend, which is decelerating again after stalling in the spring.

Not everything is clean. Airfares are still up 26.5% year-over-year even after a modest monthly tick. Recreation jumped 0.5%. Some goods categories are still showing tariff residue. And the big wildcard: oil is back. Crude is up more than 10% in a week, gasoline remains elevated due to tight refining capacity, and the war has restarted. The June deflationary tailwind from energy could flip to a headwind fast.

Bottom line — the March-through-May inflation scare looks like it was an energy story dressed up in core clothing. June ripped that costume off. Whether July keeps the disinflationary trend alive depends heavily on where oil goes from here. Trade accordingly. Continue reading at Forexlive.