U.S. CPI cools to 3.5%, below 3.8% forecast; Treasury yields drop

3.5% annual CPI and a 0.4% monthly decline put the June U.S. inflation report firmly in macro-surprise territory. The Bureau of Labor Statistics release, cited by CNBC and the Financial Times, showed headline inflation cooling from 4.2% in May and landing below the 3.8% consensus forecast.

The market-sensitive detail was not only the annual rate. The monthly CPI drop was the largest decline since April 2020, while core CPI, excluding food and energy, eased to 2.6% from 2.9%. Energy prices did most of the work, with FT reporting a 5.7% monthly decline after oil prices retreated from the spring shock.

For rates markets, the surprise shifted the next Federal Reserve risk point. Traders pushed expectations for the next rate increase toward December rather than October, according to FT market reporting, while the U.S. dollar fell about 0.5% against major currencies. Treasury yields also declined after the release as investors marked down the near-term inflation impulse.

The caveat is energy. The same sources noted that renewed U.S.-Iran tension has pushed Brent crude back above $80, so the June CPI report is a cleaner read on the prior oil-price reversal than a guarantee that July data will keep improving.

Investors should watch the July 29 Fed meeting, the July CPI release scheduled for August 12, and whether core services inflation stays near the June run rate once energy volatility is stripped out.

Primary source: Bureau of Labor Statistics CPI release. Market reports: CNBC, Financial Times.