US CPI Review - July 2026
By Kathleen Brooks, Research Director UK
Overview of US CPI Data
The US Consumer Price Index (CPI) for June 2026 showed a surprising decline, with the headline CPI falling by 0.4%. This brought the annual inflation rate down to 3.5%, a significant decrease from 4.2% in May. The core inflation rate also moderated, decreasing from 2.9% to 2.6%. This data has bolstered market confidence, suggesting that inflationary pressures may be temporary.
Impact on Federal Reserve Rate Hike Expectations
The CPI report has drastically reduced the likelihood of a rate hike at the upcoming Federal Open Market Committee (FOMC) meeting. The probability of a rate increase on July 31 has dropped to 15%, down from 40% prior to the CPI release. Fed Governor Chris Waller indicated that a hotter-than-expected inflation print would prompt him to support a rate hike, but the current data suggests a preference for maintaining the status quo.
Details of the CPI Report
Energy prices were a major contributor to the CPI decline, dropping by 5.7% due to falling oil prices. Additionally, service sector inflation appears to have peaked, with decreases noted in car insurance, communication, clothing, medical care, and used vehicles. Shelter costs rose at their slowest pace of the year, indicating a potential easing of inflationary pressures.
Market Reactions
In response to the CPI report, gold prices surged nearly 2%, climbing back above $4,080 per ounce. However, the longer-term downtrend remains intact unless prices can break above $4,350. US stock futures also rose, with notable gains in chip stocks, while IBM faced a significant decline due to weak sales in AI hardware.
Bond Market Adjustments
Global bond yields have reacted to the CPI data, with UK 10-year yields falling below 5% and US Treasury yields dropping sharply. The 2-year yield, sensitive to interest rate expectations, decreased by nearly 10 basis points, indicating a shift in market sentiment towards riskier assets.
Future Considerations
The moderation in inflation raises questions about the Fed's future approach. While the CPI report suggests a more comfortable macro backdrop for risky assets, ongoing geopolitical tensions and rising oil prices could still pose inflation risks. The Fed's focus on inflation under Chairman Kevin Warsh will be critical in determining future monetary policy.