The June consumer price index (CPI) report is shaping up to be a classic head-fake for investors.
When the Bureau of Labor Statistics drops its latest inflation data on July 14 at 8:30 am Eastern, market participants might see something they haven’t witnessed in quite a while: A negative month-over-month headline inflation print.
Look past the headline, however, and the reality of the inflation environment is far less encouraging.
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To understand the stakes for June, we have to look back at the scorcher we saw in May. Headline CPI surged 0.5% for the month and a blistering 4.2% over the prior 12 months. That reading, which followed a hot 3.8% annual rate in April, marked a second straight monthly acceleration in inflation.
It was enough to force the Federal Reserve’s hand. At the mid-June FOMC meeting – the first with Kevin Warsh at the helm as chair – the Fed’s rate-setting committee struck a decidedly hawkish tone. Surprised by the sticky inflation data, the Fed bumped its median 2026 inflation forecast up to 3.6% from 2.7%. It also nudged its median fed funds rate projection (the so-called dot plot) to 3.8% from 3.4%, signaling that rates will be staying higher for longer.
So, what has changed heading into the June inflation report? In a word: Geopolitics.
The key is core, not headline, inflation
May’s monthly print was heavily driven by a geopolitical energy price spike, led by a sharp rise in gasoline prices. Thanks to a mid-June ceasefire and the reopening of the Strait of Hormuz, oil prices plunged roughly 21% to hover around $77 a barrel. Prices at the pump soon followed.
This dramatic reversal in energy prices means the headline CPI number for June could actually flip negative.
“On inflation, while pump prices have been stickier than crude, they still fell 10% in June, or the fourth largest monthly decline in the past decade,” writes Douglas Porter, chief economist at BMO. “There’s not much of a seasonal adjustment in June gasoline prices, so that alone will carve 4 ticks from overall prices.”
As a result, Porter notes, BMO and the broader consensus are looking for headline CPI to drop 0.1% month-over-month, effectively clipping the annual headline inflation rate to 3.9%.
But here is where the good news abruptly ends for the Fed, as well as investors. The central bank largely looks past volatile food and energy costs to set monetary policy, focusing instead on core CPI. Unfortunately for all involved, this trend remains stubbornly firm.
(Image credit: Getty Images)
“Core prices are expected to grind up another 0.3%, keeping the annual core trend steady at 2.9% – precisely where core CPI inflation stood a year ago,” Porter adds.
This sharp divergence – a cooling headline figure driven purely by an energy swing, paired with sticky core inflation – creates a highly complicated backdrop for the Fed.
Unsurprisingly, Fed officials themselves appear somewhat divided on the path forward. New York Fed President John Williams recently pointed to easing inflationary pressures, particularly in moderating shelter costs. Conversely, Chicago Fed President Austan Goolsbee voiced concerns that inflation is trending in the wrong direction. This internal split has some market watchers floating an unexpected possibility: That the next Fed move might actually be a rate hike, rather than a cut.
“Inflation data next week will be the last major data print ahead of the July FOMC meeting,” notes Mark Cabana, rates strategist at BofA Securities. “The print we expect should keep markets patient on a July hike, but depending on composition, may get the market closer to 50/50 for hike vs hold.”
Further complicating the Fed’s mission is the fact that consumer expectations are drifting upward. The New York Fed’s latest survey showed one-year-ahead inflation expectations climbing to 3.7% in June, or the highest level since September 2023. Three-year expectations also crept up to 3.3%.
The bottom line
Prepare for a seemingly contradictory narrative when the next CPI report drops on July 14. The headline monthly number will likely look surprisingly soft, or even negative, potentially generating headlines about how inflation is cooling.
But a one-month dip in energy prices doesn’t mean the macro picture has changed.
There’s a reason the Fed focuses on core inflation. Food and energy prices are volatile. Strip those out and the trend looks more troubling. The Fed’s newly hawkish tilt on rate policy is likely to remain intact.