Inflationary pressures in the US moderated in June, which may ease pressure on the US Federal Reserve Board (Fed) to raise interest rates. Inflation surged higher over March to May amid the conflict in the Middle East, which pushed up oil prices. In June, upward price pressures on oil faded as the US and Iran reached an interim peace deal. While the slowdown was encouraging for markets and the US economy, inflation remains elevated, meaning the Fed cannot completely rule out an interest-rate hike. In fact, Fed Chair Kevin Warsh commented yesterday the Fed will not tolerate high inflation.

• The US annual inflation rate was 3.5% in June, down from the 4.2% rate in May. This was the lowest rate since April. Inflation slowed more than economists had expected, based on a Bloomberg survey.
• The biggest driver of June’s slowdown was energy prices, which grew at a softer pace in June compared to May on a year-over-year basis. The price growth for food and shelter also slowed in June.
• The annual core inflation rate, which excludes more volatile items, fell to 2.6% in June from 2.9% in the previous month.
• On a month-over-month basis, consumer prices in the US fell by 0.4% in June, which marked their first decline in six years. Energy prices declined by 5.7% over the month. Conversely, food prices rose by 0.2%.

Attention turned to the Fed, which makes its next interest rate announcement on July 29. Markets expect the Fed to raise interest rates sometime this year. The slowdown in inflation could be short-lived with US-Iran tensions heightening in recent days, which pushed up oil prices. Here in Canada, the Bank of Canada (BoC) makes its interest rate announcement today. The BoC is facing elevated inflationary pressures but weak economic growth, making the decision a difficult one for Canada’s central bank.

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