CPI falls more than expected, prompting an audible sigh of relief at the Fed

The June headline Consumer Price Index (CPI) fell by 0.4% from May, beating expectations of a 0.1% decline. On an annual basis, this resulted in a 3.5% increase from June 2025, 0.3 percentage points below the expected 3.8%.

Core inflation, which excludes food and energy, was unchanged for the month and eased to 2.6% year over year from 2.9% in May. That was a welcome surprise that points to broader improvement after the strong inflation readings in the spring. It is too early to call this a trend, but it should reinforce the Fed’s stance that patience (on interest rates) is a virtue.

This report is likely to reinforce the view that inflation is moving closer to the Federal Reserve's goal. A flat core reading and slower shelter inflation reduce the pressure building toward a rate hike. Policymakers will still want to see several more months of similar reports before softening their emphasis on price stability, but this was an encouraging step in the right direction.

Contributing to this positive report was a major drop in fuel prices, but it was not alone. Gasoline prices plunged 9.7% in June, driving a 5.7% drop in the energy index, while food prices still rose 0.2%. Some everyday costs also improved, including motor vehicle insurance, medical care, apparel, and used cars. Eggs went their own way and continued climbing with another 4.3% monthly increase. Price changes rarely move evenly across the shopping cart, which is one of the reasons food inflation can feel so unpredictable.

Lower fuel prices should immediately leave many families with a little extra cash after filling up the tank. At the same time, shelter costs continued to rise, albeit at a much slower pace, while grocery prices kept inching higher. The result is that purchasing power improved this month, but most households are still paying noticeably more than they were a year ago.

A word on Personal Consumption Expenditures (PCE):

Although the latest PCE report is not yet available, this CPI report suggests it will likely also show softer inflation. However, the improvement may be somewhat smaller because of differences in how the two measures calculate inflation. Even if the Personal Consumption Expenditures Price Index does not move in lockstep with the Consumer Price Index, this report offers some tentative relief for consumers and policymakers.