Inflation cools to 3.5% in June in relief brought by brief US-Iran peace deal

Inflation cooled to an annual rate of 3.5% in June as the brief US-Iran ceasefire, which has since ended, brought energy prices down, according to new data from the Bureau of Labor Statistics.

The consumer price index (CPI), which measures a basket of goods and services, has been elevated since the start of the war, largely because of higher energy prices. After mostly staying under 3% since mid-2024, CPI reached a three-year high of 4.2% in May – up from 2.4% in February. Month-over-month, CPI fell 0.8% in June, the largest one-month decrease since April 2020.

Declines in the energy index were the largest contributor to the overall decline in CPI, offsetting increases in other indexes such as food, utilities and shelter. Gasoline prices dropped 9.7% from May to June and fuel oil, which includes diesel and kerosene, was down 9.2% for the month. Apparel also ticked down 0.6%. Stripping out volatile energy and food prices, core inflation – which the Federal Reserve watches closely to measure underlying inflation – decreased slightly to 2.6% on a yearly basis and remained flat from the previous month.

Though the US-Iran peace agreement brought some relief to energy prices, recent strikes between the two countries have sent oil prices climbing again. Donald Trump said on Monday that the strait of Hormuz, where a fifth of the world’s oil and gas typically passes through, will remain open “with or without Iran” and claimed that the US will reinstate its blockade of Iranian ports.

In turn, Brent crude, the global benchmark for oil, hit $80 on Monday just after it reached a recent low of $67 earlier in July. Prices at the pump have also gone up: the national average price for a regular gallon of gas increased to $3.87 a gallon last week, 70 cents more per gallon than a year ago.

Higher energy prices have trickled into higher prices in other industries, including travel. Delta said in its quarterly earnings last week that it expected high airfares to last and has passed on 60% of its extra fuel costs to consumers.

Though Trump said last month that he was not concerned about the elevated figure, surveys have shown that many Americans disapprove of his handling of the war. A recent Harris-Guardian poll found that a majority of Americans believe the economy is getting worse now compared with February, and 95% believe the country is in an affordability crisis.

Despite the heightened inflation over the past few months, the American job market has remained relatively steady. The average number of jobs added to the economy from April through June was 111,000, indicating a relatively strong labor market amid economic uncertainty.

The US Federal Reserve will weigh both rising prices and the labor market in their upcoming board meeting scheduled for 28 and 29 July. Last month, the central bank unanimously voted to maintain rates and emphasized its goal to deliver price stability. Inflation remains well above the central bank’s stated goal of 2%.

In a testimony in Congress before the House financial services committee on Tuesday, Kevin Warsh, the new Fed chair, vowed that “the inflation surge of the last five years will be a thing of the past,” and said it was the central bank’s duty to take a “fresh look at current practices to make sure we are serving our objectives”.

Warsh did not expand on any future rate-setting decisions. He emphasized the Fed’s commitment to achieving “price stability”, which he defined as “a change in prices such that households and businesses don’t have to worry about it, don’t have to think about it.”

Warsh also acknowledged the advent of AI as “perhaps the most significant change in our economy in my adult lifetime”, and said that while it wasn’t the central bank’s job to predict consequences of AI, he believed that the US would emerged as a winner in developing the technology.

“I think there is a material improvement in productivity, which should have a material improvement ultimately in wages and the strength of the economy,” he added. “But the long term can be quite far out, and we’ve got to monitor things month by month, quarter by quarter, as we get there.”