Inflation likely eased in June as gasoline prices fell, offering consumers some relief, though renewed tensions involving Iran have caused oil prices to climb again.
The government's latest inflation report is forecast to show that consumer prices dropped 0.2% in June, according to a FactSet survey of economists. This would mark the first monthly decline in nearly four years. Year-over-year, prices are expected to have risen 3.9%, down from 4.2% in May.
Gas prices have continued to fall in July, suggesting further inflation moderation in the upcoming report. However, these improvements may not fully alleviate concerns about affordability, which have become a political challenge for the Trump administration as the midterm elections approach. Inflation remains higher than it was prior to the recent escalation of conflict with Iran, when it stood at 2.4%.
The situation in the Middle East remains volatile. On Monday, the price of Brent crude oil, an international benchmark, increased by 9.6% to $83.30 per barrel after both the United States and Iran asserted control over the Strait of Hormuz.
Increases in gas prices have also led to higher airfares and elevated shipping costs for goods like groceries due to rising diesel prices.
Analysts will also consider other factors affecting inflation. Economists predict that major World Cup matches held in 11 U.S. cities may have boosted hotel prices. While new and used car prices are expected to have decreased, prices for many services, including restaurant meals, entertainment, and healthcare, continue to rise at a faster pace than pre-pandemic levels.
Excluding volatile food and energy components, core prices are projected to have risen 0.2% in July from the previous month and 2.8% from a year earlier, according to FactSet. If monthly increases at this rate continue for the remainder of the year, core prices—which the Federal Reserve closely monitors—would move nearer to the Fed's target.
A slowdown in inflation could lessen the pressure on the Federal Reserve to increase its key interest rate, a measure typically used to curb spending and price increases. Federal Reserve Chair Kevin Warsh, who assumed office on May 22, has emphasized the Fed's focus on returning inflation to its 2% target but has not indicated the Fed's future policy actions.
However, other Federal Reserve officials have cautioned that inflation has exceeded their target for over five years. They suggest that a rate hike might be necessary unless clear signs of a decline emerge. John Williams, president of the Federal Reserve Bank of New York, stated last week that a monthly increase in core inflation of 0.2% or less for the rest of the year would align with a trend of declining inflation.
Some Fed officials have expressed concerns that significant investments in artificial intelligence infrastructure could exacerbate inflation by increasing prices for essential components like memory chips, semiconductors, and electricity. Consequently, companies such as Apple, Microsoft, and Dell have announced price adjustments for products like laptops, tablets, and video game consoles.
Fed Governor Christopher Waller noted on Monday his concern about core inflation, which he stated had risen from 3% last December to 3.4% in May, according to the Fed's preferred measure using Consumer Price Index data. He pointed out that the cost of more than two-thirds of services has increased by 3% or more compared to a year ago.
Waller, who had previously favored interest rate cuts earlier in the year, is now warning that a rate hike may be necessary. He stated, "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."
Gas prices have fallen nearly 20% from their peak in late May but have seen a rebound in the past week, likely due to renewed fighting in the Middle East. Nationwide, gas prices averaged $3.87 per gallon on Monday, an increase of 7 cents from the previous week. A month ago, prices averaged $4.09, according to AAA.
Other economic indicators present a mixed picture. A recent survey by the Federal Reserve Bank of New York found that nearly half of companies in its region that have paid tariffs still plan to increase their prices further.
In contrast, Walmart announced last week a rollback of prices on thousands of items, including ground beef, potato chips, toys, and clothing. President Donald Trump publicly praised the move on social media, suggesting credit for the price reductions, although Walmart's announcement did not mention the president.