US CPI: Doves need more, but cooling at the core

Key takeaways 

• The US Consumer Price Index (CPI) declined by 0.4% in June and rose 3.5% year-over-year (YoY), improving from the 4.2% YoY reading recorded a month earlier, which had been the highest level since April 2023.
• Core CPI was unchanged in June and rose 2.6% year-over-year (YoY), with the softer monthly reading suggesting that underlying services inflation remains contained.
• Rate hikes odds plummeted lower for the upcoming July meeting off the back of today’s report.

What happened? 

Today's CPI release was softer than the prior month and points to a moderation in inflation momentum, with both headline and core inflation showing signs of easing.

Delving deeper into the report, the primary driver of lower inflation was energy. After contributing significantly to May's increase, energy prices notably abated in June, with the energy index falling 5.7% MoM and helping pull headline CPI lower. By contrast, food prices remained relatively stable, rising 0.2% MoM and 3.0% YoY. Shelter inflation continued to moderate, increasing 0.1% MoM and 3.3% YoY, while owners' equivalent rent rose 3.3% YoY. Taken together, the data suggest that previously elevated inflation components are normalizing, aided by an increase in housing supply across select major metropolitan areas. Notably, there remains limited evidence of tariff-related price pressures in the CPI data, as several import-sensitive categories declined during the month. Apparel prices fell 0.6% MoM, while footwear prices declined 0.3% MoM, suggesting that any pass-through from higher import duties to consumers has so far been modest.

Within core inflation, inflation tied to the AI buildout continues to emerge in select categories. Software prices increased 2.3% over the month and approximately 17% over the past year, reflecting strong demand for AI-related computing capacity and digital services. Beyond these areas, some of the strongest annual price gains were seen in airline fares, which rose 26.7% YoY, while recreation and medical care prices increased 2.8% YoY and 2.0% YoY, respectively, highlighting pockets of resilience within the services sector. Overall, the flat core reading suggests underlying services inflation remains contained.

What does it mean for investors? 

Downside surprise seems like the appropriate term for today’s CPI report. CPI came in meaningfully cooler than expected, with both headline and core inflation surprising to the downside and marking the softest readings since early 2026. Today’s report, taken in tandem with the recent downbeat NFP report, pushes back against recent hawkish Fed rhetoric. In turn, rate hike odds were taken down across the board this morning. Odds for a 25-bps hike at the July meeting sat at 43% as of yesterday’s close, today, post-print, those odds have plummeted to about 14%. Similarly, the odds for a hike between now and the September meeting were a forgone conclusion at 100% as of yesterday’s close but have since been ratcheted down to 63%.

In response to this, treasury yields took a parallel shift lower across the curve, with the sharpest moves lower taking place in the front end of the curve as the can gets kicked out further for a potential hike this year. More encouraging than the downdraft in yields itself would be how the curve is acting, though. The 2s10s treasury curve has almost roundtripped the entire move (flattening) from Warsh’s first meeting as chairman, bull steepening off of today’s cooler than expected CPI print, currently siting at 38 bps. The release valve for higher rates had been in FX and to no surprise the dollar slid on today’s news as rate differentials compressed vs other G10 economies. It should be noted that the US dollar (DXY) was flirting with 52-week highs over the past several days, a notable headwind for multinational corporations and for global growth more broadly. With that said, the downdraft in yields and weakness in the dollar comes at an opportune time for Gold as the precious metal was teetering at the psychological level of 4000 yesterday and has risen roughly +200 bps post-print. In aggregate, lower yields and a weaker dollar are also a tailwind for equities, but that’s not particularly relevant at this point in time. All major indices initially rallied off of the data release this morning, but the real driver for stocks lies ahead in 2Q reporting season.

Today’s CPI report was a welcome sign to policy makers, doves in particular. The data this morning buys the FOMC time to wait and see, but not to ease., The reprieve in rates and FX is certainly a tailwind for the real economy, but at this point in time it still feels like AI capex is in the driver’s seat for economic growth and the stock market.