Rear view of inflation shows cooling

July 14, 2026

The consumer price index (CPI) fell 0.4% from May, aided by a 9.7% drop in prices at the gas pump. Energy prices were weak across the board with the exception of natural gas prices.  A temporary détente which opened the Strait of Hormuz helped fuel those declines, which have since reversed course on renewed tensions between the two foes.

Food prices edged up 0.2% in June and rose 3% from a year ago. The year-over-year increase in food prices was the hottest pace of food inflation since April 2023. Strong gains in the cost of packaged goods from cereals to baked goods and nonalcoholic beverages more than offset declines in dairy products and meats. 

A rise in the cost of aluminum, which has risen in response to tariffs, the war and the surge in data center construction, contributed to those gains. The full effects of the conflict in the Middle East are not expected to show up until the fall harvest and into 2027. A surge in fertilizer, chemicals and diesel fuel is expected to curb global crop yields this year. Many markets in emerging Asia and parts of Africa have already suffered crop losses, notably rice. 

Grocery stores have been hit by a cut to SNAP funds and the rise in the use of GLP-1 drugs. That is showing up as reduced spending at grocery stores, especially by low- and middle- income households. Some major chains are offering price cuts to bring back consumers. The challenge is margins, which are thin and will be squeezed further by another jump in transportation costs.  

The three- and six-month annualized pace of consumer prices, better measures of momentum, cooled to a 2.8% and 4.1% pace, respectively. That marks a sharp deceleration from the 8.2% and 5.6% seen in May and gives the Federal Reserve some breathing room on its inflation concerns. 

The new Fed chairman, Kevin Warsh, has said that he is watching momentum in the data, which broke in his direction in the June report. He has pledged to return to the former Fed Chairman Alan Greenpans’s style of communications, which was dubbed “Fedspeak” for the ambiguity Greenspan used in discussing the economy. He focused on price stability more than the labor market in much of his commentary, something we have already heard Warsh do as well.

Core CPI, which excludes food and energy, moved sideways in May, another welcome sign. Core inflation rose only 2.6% from a year ago, the slowest pace since March, just after the initial war with Iran began. 

The three-and six-month annualized pace cooled to 2.3% and 2.6% annualized. That is down from 3.2% and 3.1% in May and marks the hottest pace in more than a year for both measures.  

The shelter component decelerated sharply to a 0.1% increase in June. Most of the cooling was in rents, which show up with a lag when new leases are signed.  They are cooling in response to overbuilding in what were some of the hottest post-pandemic markets. Hotel room rates plummeted as well.

Vehicle prices remained constrained, which has helped open the door to more sales.  They hit the strongest pace since September 2025. Affordability is still a problem, although insurance rates for vehicles have receded as well. That is another plus for consumers.

The problem is vehicle parts, which along with maintenance costs, are rising more rapidly. Tariffs and increased input costs due to the closure of the Strait of Hormuz are the main culprits. Insurance costs are expected to catch up to those gains later in the year and into 2027. In the interim, the relief is welcome news.

Recent work by the New York Fed suggests that we have yet to feel the full pass-through of tariffs. Another round of tariffs is slated for August. Those are designed to recoup the tariffs ruled illegal by the Supreme Court and could buoy goods prices later in the year. 

However, we are seeing push-back from low- and middle-income households, who struggled the most in the wake of higher energy prices. Firms that service those households have noticed a distinct pullback in spending. That demand destruction likely amplified the cooling effect that lower energy prices had on overall inflation.  

Manufacturing surveys revealed some efforts to front-run price hikes in recent months, which may have helped cool prices further in June. The challenge is when those inventories are re-stocked.

Separately, consumer electronics are poised to move higher after falling for decades. That reflects a combination of chip shortages due to data center demand and tariffs. The costs associated with the AI boom are front-running the productivity growth needed to fully offset inflation.

Service sector inflation cooler, but still simmering  

The super core services, which strip out shelter costs, fell 0.2% in June after rising 0.5% in May. That pushed the year-over-year gain in services inflation to 3.1%, which is cooler than the 3.7% pace of May, but still elevated.  

Insurance and medical costs were cooler during the month. Those figures map directly into the PCE index of inflation and suggest that the PCE index will come in cooler as well for the month. We will see more inputs tomorrow with the release of the producer price index (PPI) data.

The gains were in airfares, which remain stubbornly high – airfares were up 26.5% from a year ago in June. Travel and tourism associated with the FIFA World Cup helped buoy airfares and admission to sporting events, which spiked during the month. 

Refined fuels, including jet fuel, remain elevated. Refining capacity is limited and spot prices have moved up, while competition for cheap airfares has diminished with the failure of Spirit airline at the start of the war in Iran. Postal costs are another area where prices are rising much more rapidly.  

A larger issue is aging demographics and healthcare costs. An end to temporary protected status for hundreds of thousands of immigrants in July meant that many firms are being forced to let workers go. Those losses are leaving gaps in the labor market, notably for leisure and hospitality and in the care economy. That should boost costs into the latter part of the year along with other pressures in the pipeline.