Inflation Cooled in June, and There's Good and Bad News for Investors

What a relief!

Inflation, which has been spiking for months, finally receded a bit in June, according to a government report released last week. But it wasn't all good news for the stock market, either.

While still too high, inflation finally cooled a bit in June, with the headline Consumer Price Index (CPI) down 0.4% from the previous month, the biggest one-month decline since April 2020. And when volatile food and energy costs were excluded, the index was flat month over month, which is still an improvement from the 0.2% increase in May.

That's very good news for investors in two ways.

First, cooler inflation means less stress on consumers, who have been struggling to meet essential spending needs due primarily to higher prices at the gas pump.

When that happens, many companies feel the pain, too. For example, PepsiCo recently reported worse-than-expected second-quarter results and CEO Ramon Laguarta said higher gas prices were the reason, as consumers had to pull back on nonessential purchases like the snacks and soda his company sells. PepsiCo shares have been trending lower for months due to consumer stress.

Also, lower inflation means the Federal Reserve is less likely to raise rates in the coming months. That's what the futures market is indicating, too. Just before the CPI report came out, futures traders were pricing in a 42% chance that the Fed would hike its target rate in July. Since the report, that's fallen to about 14%.

The stock market tends to perform poorly when the Fed raises rates.

Not all was rosy in the CPI report

But the report wasn't completely rosy for the market either.

That's because the lower inflation level in June was primarily due to falling energy prices. Gasoline prices decreased 9.7% during the month, and fuel oil dropped 9.2%. Those decreases offset increases in other consumer costs, such as shelter and food.

And that drop in energy prices was due to lower crude oil prices resulting from a temporary truce between the U.S. and Iran and a slight opening of the Strait of Hormuz, through which about 20% of the world's oil flows.

The average price of gasoline in the U.S., including all formulations of gas, fell from $4.48 a gallon on May 25 to $3.81 on June 29, according to Federal Reserve data. That was a huge boon for consumers.

Image source: Getty Images.

But the ceasefire ruptured in the first week of July, with the U.S. and Iran trading strikes and President Donald Trump declaring the relatively brief peace to be "over." Since then, the price of a barrel of Brent crude has spiked to around $88. Crude at that level risks broader macroeconomic complications, as it can slow economic growth and bleed into core prices, since companies need oil and gasoline to manufacture products and transport them to market.

So, while investors should celebrate the inflation relief we saw in June, the economy is not out of the inflation woods just yet.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.