Inflation is primed to fall for the first time in 6 years. Will high prices drop too?

By Jeffry Bartash

Falling gas prices will likely lower June's CPI reading - but that doesn't mean the Fed won't raise interest rates

Groceries and gasoline top the list of goods Americans are struggling to afford, polls show.

A surge in U.S. inflation to a three-year high has begun to recede, but life isn't going to get more affordable for Americans anytime soon.

The cost of living is all but certain to decline in June for the first time since the pandemic six years ago - entirely due to a sharp drop in gasoline prices. The cost of a regular gallon of gas tumbled 15% from mid-May to the end of June.

Economists predict the U.S. consumer-price index fell by 0.2% in June. The critical report for Wall Street DJIA SPX COMP will be released Tuesday morning.

The yearly rate of inflation should follow suit, slowing to 3.8%, from 4.2% in May. The May rate was the highest since April 2023.

Even so, inflation remains stuck well above the Federal Reserve's 2% goal, and it's a lot higher than what Americans had become accustomed to before the pandemic. Inflation was largely invisible less than a decade ago.

The cost of filling up at the gas station is not the only problem, either. Prices began to rise faster even before the U.S. attacked Iran at the end of February.

The clearest evidence is in a separate measure of the CPI known as the core rate, which omits food and energy prices. The core rate is a better predictor of inflation trends in the long run.

The core CPI moved up to a 2.9% rate in May, from 2.5% at the start of the year - underscoring the challenge for the Fed. The core rate is expected to rise 0.2% in June; if so, the yearly rate could fall a tick to 2.8%. Better, but still not good.

The persistence of inflation is a big challenge for new Fed Chair Kevin Warsh, who was nominated by President Trump largely on the hope he would lower borrowing costs.

Warsh has to tame excess inflation - ruling out near-term rate reductions - and ideally avoid steep rate increases that make credit even more costly to obtain.

Warsh will testify before Congress this week on his inflation-fighting strategy for the first time since taking over the top Fed job in May.

What will play a big part in his thinking is how the situation in the Mideast unfolds. A tenuous cease-fire between the U.S. and Iran has broken down and both sides are lobbing missiles and drones at each other, nudging oil prices higher.

Yet oil prices are still far below peak levels seen during the U.S.-Iran conflict, when a barrel of West Texas Intermediate crude (CL00) (CL.1) reached as high as $115 a barrel.

Oil prices rose on Monday and hovered around $75 a barrel, but they were not far from preconflict levels of $65. Nor are they likely to climb much higher unless the fighting becomes worse and the Strait of Hormuz, a critical transit route for oil supplies, is closed to shipping traffic.

Whatever the case, energy is just one part of the inflation puzzle. Prices began to rise faster even before the U.S. attacked Iran at the end of February.

The residual effects of the Trump tariffs probably played a role by raising the cost of some goods, but by far the bigger problem with inflation stems from the cost of services - things like rent, car repairs, recreation, dining out and so forth.

Service-related inflation is less affected by tariffs or energy costs. Yet it's still rising at a 3.4% pace, up from 2.9% in January and a 2.6% average annual increase from 2010 to 2019.

It's possible the World Cup could boost services costs in June given the demand for hotels, flights, meals and tickets from people going to the matches, but any influence should prove short-lived.

Inflation will have to keep slowing - and do so quickly to keep the Fed from raising interest rates. There's plenty of doubt that such progress will be forthcoming.

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-13-26 1413ET