'Surprise'? Inflation Falls in June As Hormuz Crisis Eased

Held: Not all inflation is created equal. 

As prices pushed up this year, political analysts began drawing comparisons to the impact of the Biden Regency's inflationary wave. The concern over the electoral impact is legitimate, but the analogy is inaccurate, I have argued all along. The Biden inflation wave came from overstimulus in a broad supply-chain crisis coming out of the pandemic shutdowns, and didn't fully recede until the supply chains were fully restored. The inflation jump this year reflected a single supply choke point, and I predicted that restoration would immediately impact inflation.

Thus, today's drop in the Consumer Price Index inflation rate comes as no surprise ... to me, anyway:

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent on a seasonally adjusted basis in June after rising 0.5 percent in May, the U.S. Bureau of Labor Statistics reported today. This decline in the all items index was the largest 1-month decrease since April 2020 when it fell 0.8 percent. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment.

The index for energy fell 5.7 percent in June after rising 3.9 percent in May, 3.8 percent in April, and 10.9 percent in March. The energy index was the largest contributor to the monthly all items decrease, more than offsetting increases in other indexes including those for shelter and food. The index for food increased 0.2 percent over the month, as did the index for food at home and the index for food away from home.

The index for all items less food and energy was unchanged in June. Indexes that decreased over the month include motor vehicle insurance, communication, apparel, medical care, and used cars and trucks. Conversely, the indexes for recreation, household furnishings and operations, and personal care were among the major indexes that increased in June.

The all items index rose 3.5 percent for the 12 months ending June after rising 4.2 percent for the 12 months ending May. The all items less food and energy index rose 2.6 percent over the year, following a 2.9-percent increase over the 12 months ending May. The energy index increased 15.7 percent for the 12 months ending June. The food index increased 3.0 percent over the last year.

It did, however, come as a surprise to people who should know better:

Consumer prices were up 3.5% in June from a year earlier, beating expectations and improving from the 4.2% inflation rate in May. Inflation was also lower than the 3.8% that analysts polled by The Wall Street Journal expected.

Over the month, consumer-gasoline prices dropped substantially from May. But even excluding food and energy products, prices were broadly flat, evidence that inflation trends improved.

To be clear, 3.5% is still running a little too hot for comfort, but that reflects a full year of price inflation – including the last four months of war. Normally, we would want inflation around 2%, well controlled, low enough to allow for real wage gains but not so low that we fall back into extended deflation. The Federal Reserve generally adjusts monetary policy with that in mind, along with the job-creation market, to ensure the stability of both the US dollar and the American economy. 

At 3.5% for an extended time, households will still experience some wage erosion, which will produce political impacts Republicans would rather avoid. However, as Washington Post econ reporter Heather Long points out, the drop in oil prices led directly to price reductions in goods and services as well as at the gas pump:

Here's the (good) surprise in the June inflation report: Many items saw a decline in prices.

It was more than falling gas prices.
Electricity was down a bit
Car costs were down a bit
Apparel costs were down a bit
Transportation costs were down a bit
Even medical service costs… pic.twitter.com/OfpP6aXZvO

— Heather Long (@byHeatherLong) July 14, 2026

Even medical service costs were down a bit (!)

 This is why Core Inflation was flat in June and cooled to 2.6% in the past year (down from 2.9% in May).

This is exactly what happens in an oil shock. Prices shoot up across a broad spectrum of goods and services, because energy costs impact the entire distribution chain. That happened in the Biden inflation wave too, but that was caused by too much cheap demand from stimulus impacting a choked-off supply as well as energy prices escalating by Biden's Green New Deal policies. The only supply crisis we have this time is oil, and even that is more of a speculative supply crisis, thanks to greatly increased American oil production. As soon as the crisis eased in the Strait of Hormuz, the perception of shortage began to dim and prices tumbled back to pre-war lows, bringing down the prices of everything else. 

Note, however, the use of the word ease. The crisis in the Strait of Hormuz has not been resolved yet, and now we are going back to a war footing. Oil has bounced back up this week as a result, although still within a tenable range of $80-85 a barrel. Inflation may well pop back up in July, and that again will still have some political ramifications as voters worry about wage erosion again. However, this demonstrates that inflation in this round is entirely the result of a single crisis point rather than broad economic mismanagement, and that crisis point needs to be resolved on a permanent and enforceable basis to end this risk once and for all. 

Editor’s Note: Thanks to President Trump’s leadership and bold policies, America’s economy is back on track.

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