The Consumer Price Index slipped 0.4% in June from May, the first monthly decline since 2020, the Bureau of Labor Statistics reported Wednesday. The surprise drop sent bond yields tumbling and traders quickly abandoned bets on further Federal Reserve rate hikes.
The inflation print that broke the streak
June's inflation figure is the softest since the pandemic-era lows of 2020. Economists had expected a modest increase of 0.1% for the month. Instead, the outright decline — driven by falling gasoline prices, cheaper airfares, and lower used-car costs — caught markets off guard.
Core CPI, which strips out food and energy, rose 0.1% on the month, below the 0.2% forecast. On an annual basis, headline inflation is running at 3.0%, down from 3.3% in May. That's the smallest 12-month gain since March 2021.
Traders flip their Fed bets
The bond market rallied hard. The yield on the 2-year Treasury note, which is sensitive to Fed policy expectations, fell 12 basis points to 4.41%. The 10-year yield dropped to 4.19%.
Futures contracts tied to the Fed's policy rate now show a 95% probability that the central bank will hold rates steady at its July meeting. Just a week ago, traders had priced in a 30% chance of a hike. Some are now even talking about the potential for a rate cut later this year.
“The Fed’s last mile on inflation may be shorter than they thought,” said one trader at a large New York bank, speaking on condition of anonymity because he wasn't authorized to comment publicly. “The market is repricing the entire path.”
What the data means for the Fed's next move
Federal Reserve Chair Jerome Powell has repeatedly said the central bank needs more evidence that inflation is sustainably moving toward 2% before cutting rates. Wednesday's data gives him that evidence, but it's only one month.
The Fed has kept its benchmark rate in a range of 5.25% to 5.50% for nearly a year. The June CPI report is the softest inflation print the central bank has seen since it began its aggressive tightening cycle in 2022.
Still, labor market conditions remain tight, and the Fed has emphasized it wants to see a sustained trend, not a single data point. The market is now watching for the July 31 Fed decision and the accompanying press conference for any shift in language.
