US June CPI MoM Slumps 0.4% in Biggest Drop in Six Years, Core Inflation Unexpectedly Hits Zero, Gold Rises Near 4,100 Level

TradingKey - On July 14, Eastern Time, the data released by the U.S. Bureau of Labor Statistics brightened the market's outlook. In June, the unadjusted CPI rose 3.5% year-on-year, slowing significantly from 4.2% in May and also coming in below the market expectation of 3.8%. The seasonally adjusted CPI fell 0.4% month-on-month, marking the largest single-month decline since April 2020 and far exceeding the market expectation of -0.1%.

What surprised the market even more was the performance of core inflation. In June, the unadjusted core CPI annual rate came in at 2.6%, well below the market expectation of 2.8% and the previous value of 2.9%; the core CPI monthly rate was 0%, marking the smallest increase since January 2021, compared with the market's prior expectation of 0.2%.

[Source: U.S. Bureau of Labor Statistics]

Oil prices were the direct driver of this round of cooling inflation. In June, both gasoline and fuel oil prices fell by more than 9% month-on-month, and the average monthly price of Brent crude fell from approximately $103.7 per barrel in May to $84.4 per barrel.

The core service prices excluding shelter, which the Federal Reserve watches most closely, fell month-on-month for the second consecutive month. Shelter costs rose by only 0.1%, and transportation service prices fell by 0.3%, indicating that the labor market's pull on inflation is weakening. Food prices rose by 0.2%, new car prices remained flat, used car prices fell by 0.2%, and apparel prices fell by 0.6%.

The broad cooling of inflation data is reshaping market expectations for the Federal Reserve's policy path. According to the CME FedWatch Tool: after the data release, the probability of the Fed keeping interest rates unchanged in July rose to 83.4%, while the cumulative probability of a 25 basis point rate hike stood at 16.6%.

However, this data reflects the price environment in June. Following the collapse of the Strait of Hormuz ceasefire on July 8, Brent crude has rebounded back above $80. The tug-of-war between Middle East tensions and inflation is far from over.

Following the data release, Fed Chairman Warsh reiterated that he 'will not tolerate high inflation,' emphasizing that policymakers 'are all determined to restore price stability.' In his speech prepared before the CPI data release, he stated: 'If we can formulate the right policies, and we certainly can, then the inflation problem of the past five years will become history.'

Spot gold surged, nearing the $4,100 threshold, with its intraday gain briefly exceeding 2.5%. The US dollar index ticked down in the short term, while futures for the three major US stock indices edged higher.

[Source: TradingView]