US Inflation Cools Sharply in June, First Monthly Drop in Six Years

US consumer prices unexpectedly fell in June, with the headline Consumer Price Index dropping 0.4% on the month, its first monthly decline in about six years, according to Labor Department data. That pulled annual inflation down to 3.5% from 4.2% in May, well below the 3.8% economists had expected. Core inflation, which strips out volatile food and energy, was flat on the month and eased to 2.6% year over year from 2.9%. The cooldown was driven largely by a 5.7% drop in energy prices, led by a near 10% fall in gasoline, following the earlier ceasefire with Iran, while shelter costs rose just 0.1%. The softer reading reshaped expectations for monetary policy: traders priced in roughly an 84% chance the Federal Reserve leaves its benchmark rate unchanged at 3.50%-3.75% at its July meeting, and the odds of a July hike collapsed. Still, markets continued to see a meaningful chance of an increase by September, and new Fed Chair Kevin Warsh struck a hawkish tone in congressional testimony, cautioning against complacency on prices.