Inflation cools more than expected in June as gas costs fall, underlying prices ease

Inflation cooled last month as the cost of gas, clothes and used cars fell, providing some relief to consumers, while underlying price pressures also cooled more than expected.

Prices dropped 0.4% in June from May, the largest monthly drop in four years, the Labor Department said Tuesday. On a yearly basis, inflation declined to 3.5%, down from a year-over-year gain of 4.2% in May and lower than many economists expected.

Yet oil prices rose for a second day Tuesday as the United States renewed attacks on Iran and President Trump announced a new blockade in the Strait of Hormuz, a key shipping route for about one-fifth of the world’s oil. Many Americans have soured on the economy after five years of elevated inflation, posing a risk to Trump and Republicans in the upcoming midterm elections.

Still, excluding the food and energy categories, core prices were unchanged in June, a positive sign that underlying inflation is cooling. On a yearly basis, core prices rose just 2.6%, down from 2.9% the previous month. Core inflation remains above the Fed’s target of 2%.

A wider range of prices cooled last month than economists had forecast. Electricity prices, which have been elevated by spiking demand from data centers, fell 1% from May to June, though they are still 4% higher than a year ago. Clothing prices dropped 0.6% from May to June but are 3.9% more expensive than a year earlier.

Groceries rose 0.2% from May to June and are up 2.7% from last year, while apartment rental costs cooled, rising just 0.1% last month and 2.8% from a year ago.

The inflation-fighters at the Federal Reserve remain sharply divided over next steps, according to the minutes of their June 16-17 meeting. About half of policymakers support raising interest rates by the end of the year to cool borrowing, spending, and price increases, the minutes showed. The rest are willing to wait for signs that inflation may resume falling as gas prices fall, though the minutes predate the recent flare-up of violence in the Middle East.

Fed Chair Kevin Warsh, in written testimony to the House Financial Services Committee, said Tuesday that the central bank has “no tolerance” for high inflation, which he pledged would become “a thing of the past.” Warsh was to face questions later Tuesday from members of Congress.

And the situation in the Middle East continues to change hour to hour. On Tuesday, the price for a barrel of Brent crude oil, the international standard, climbed 4.6% to $87.13 after the United States and Iran each said the Strait of Hormuz is under its control.

A slowdown in inflation could take some pressure off the Federal Reserve to raise its key rate, which it typically does to cool spending and price increases. Warsh, who took over as chair May 22, has underscored that the Fed is tightly focused on getting inflation back to its target of 2%, though he has declined to signal what the central bank’s next steps will be.

Many of those officials have said massive investments in the buildout of artificial intelligence infrastructure could also worsen inflation by pushing up prices for memory chips and other semiconductors, as well as electricity. As a result, companies such as Apple, Microsoft and Dell have announced price increases for laptops, tablets and video game consoles.

On Monday, Fed governor Christopher Waller said he was worried about core inflation, which he noted had risen from 3% in December to 3.4% in May, according to the Fed’s preferred measure, which uses data from the consumer price index. He pointed out that the cost of more than two-thirds of services have risen by 3% or more compared with a year ago.

Waller had favored cutting rates early this year, but is now warning a hike could be needed.

“If we get another hot reading on core inflation this week, then the [Fed] will need to consider tightening monetary policy in the near term,” he said in a speech in New York.

Gas prices have fallen nearly 20% from their peak in late May but have rebounded in the last week, probably in response to renewed fighting in the Mideast. Gas prices averaged $3.86 a gallon nationwide Tuesday, up 6 cents from a week earlier. They averaged $4.09 a month ago, according to the American Automobile Assn.

Other signs of where prices are headed are mixed. The Federal Reserve Bank of New York said last week that a survey found that nearly half the companies in its region that have paid tariffs still plan to raise their prices further.

Separately, Walmart last week said it was rolling back prices on thousands of items, including ground beef, potato chips, toys and clothes. Trump praised the move on social media and sought to take credit for the reduction, though the company did not mention the president in its announcement.

Rugaber writes for the Associated Press.