The June Consumer Price Index dropped to 3.5% on a year-over-year basis, down from 4.2% in May. Austan Goolsbee, President of the Federal Reserve Bank of Chicago, described the latest inflation print as “surprisingly benign” and “encouraging,” though he added that several more months of similarly positive readings are needed before anyone can declare victory over persistent price pressures.
The numbers behind the optimism
For context, July marked the 65th consecutive month that inflation has exceeded the Fed’s 2% benchmark.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, held at 3.7% in July, with core PCE (which strips out volatile food and energy prices) sitting at 3.3%.
What’s been keeping inflation elevated
Tariff effects have rippled through supply chains, adding costs that businesses have passed along to consumers. Energy prices, spiking amid ongoing Middle East tensions, have contributed their own upward pressure on the headline numbers. AI-related capital expenditure has also been adding to inflationary dynamics as companies pour billions into compute infrastructure, data centers, and the electricity to power them.
The May PCE peak of 4.1% reflected the confluence of all these factors hitting at once.
Goolsbee’s comments reflect a broader tension within the Fed. Some officials share his cautious optimism, reading the June data as genuine evidence of disinflation taking hold. Others remain skeptical, noting that one good month does not make a trend and that policy adjustments might be warranted if inflation progress stalls in subsequent reports.
Market reaction and rate expectations
The cooler June CPI print prompted markets to adjust their expectations for near-term rate hikes, with traders dialing back the probability of further tightening in the immediate months ahead.