US June CPI MoM Plummets 0.4% in Biggest Drop in Six Years, Core Inflation Unexpectedly Hits Zero, Gold Rises Near 4100 Level

TradingKey - On July 14 ET, data released by the US Bureau of Labor Statistics brightened market sentiment. The unadjusted CPI in June rose 3.5% year-on-year, slowing significantly from 4.2% in May and coming in lower than 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%.

Even more surprising to the market was the performance of core inflation. The unadjusted core CPI annual rate for June was recorded at 2.6%, far below the market expectation of 2.8% and the previous value of 2.9%; the core CPI monthly rate came in at 0%, marking the smallest increase since January 2021, compared to prior market expectations of 0.2%.

[Source: US Bureau of Labor Statistics]

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

Core services prices excluding housing, which the Federal Reserve watches most closely, were negative month-on-month for the second consecutive month, with housing costs rising only 0.1% and transportation services prices falling 0.3%, indicating that the labor market's upward pull on inflation is weakening. Food prices rose 0.2%, new car prices remained flat, used car prices fell 0.2%, and apparel prices dropped 0.6%.

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

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

After the data release, Federal Reserve Chairman Warsh reiterated that he "will not tolerate high inflation," emphasizing that policymakers are "all determined to restore price stability." In his prepared remarks written before the CPI data release, he stated: "If we can formulate the right policies, and we certainly will, then the inflation problems of the past five years will become history."

Spot gold surged, approaching the $4,100 mark, with its intraday gain briefly exceeding 2.5%. The US Dollar Index ticked lower in the short term, while the three major US stock index futures edged slightly higher.

[Source: TradingView]