Consumer Price Index June 2026

Inflation cools broadly, but upside risks remain

Headline CPI fell more than expected, down 0.4% month over month (m/m) in June. Headline inflation eased sharply, falling 0.7 percentage points (ppt) to 3.5% year over year (y/y), down from its highest level in three years in May. Energy prices were the key disinflationary force, falling 5.7% m/m, with gasoline prices down 9.7% m/m and electricity prices down 1.0% m/m.

Core CPI also came in much lower than expected, posting a flat monthly reading, or -0.02% for the second-decimal aficionados, the lowest reading outside a recession since 2017. This pushed core inflation well below expectations, down 0.3 ppt to 2.6% y/y. Disinflationary pressures were broad-based across both core goods and services. Lower prices for vehicles, apparel, furniture and medical care goods all helped ease goods inflation. Core services prices were unchanged on the month for the first time since 2021, with shelter costs posting their smallest monthly increase since January 2021, rising just 0.1% m/m, while hotel, medical care and auto insurance prices all declined.

Still, despite the good news, three factors represent upside risks to inflation persistence in the coming months. Tensions in the Middle East, with renewed strikes and a US blockade, have pushed oil prices higher, creating risks for downstream commodity prices. While there has been little passthrough from higher energy costs to core inflation — outside of airfare — this remains a risk. Lingering tariff pressures also remain a concern, with a recent New York Fed study showing that around 45% of firms are still planning to pass higher duties through to final prices. Finally, strong AI-related investment will likely continue to support pricing in selected consumer technology products and software categories. Already, computer software prices are up 17% y/y.

Looking ahead, we foresee headline inflation moving toward 3.3% y/y by December, while core CPI inflation is expected to ease toward 2.4% y/y. With Federal Reserve policymakers increasingly concerned about inflation persistence, the notably softer core CPI reading has lowered the odds of an imminent rate hike. However, following a string of hotter-than-desired core inflation prints, policymakers will likely need confirmation from Producer Price Index (PPI) data, along with several additional months of softer core inflation, before taking rate hikes off the table.

As it stands, we don't believe the July Federal Open Market Committee (FOMC) meeting will be a live one. Fed Chair Kevin Warsh stressed in his Semiannual Monetary Policy Report testimony to Congress that the FOMC “has no tolerance for persistently elevated inflation,” but we view this more as a credibility statement than a signal that a rate hike is imminent. Similarly, Governor Christopher Waller noted yesterday that if there were another “hot” core inflation reading, the FOMC would need to consider tightening monetary policy in the near term. He added that, after the rise in core inflation over the first half of the year, he would need to “see several months of lower readings to feel that inflation is moving in the right direction.”

Our base case remains that the Fed will stay on hold through the rest of the year, but it's a 60-40 call. Indeed, the June median fed funds rate projections showed an even split, with nine Fed policymakers expecting at least one rate hike in 2026 and nine favoring no further tightening. In addition, the FOMC minutes indicated that persistent inflation, whether driven by renewed tensions in the Middle East, tariffs or strong AI-related demand, could warrant additional policy tightening.

In the details:

• Energy prices fell 5.7% m/m in June, only partially reversing the 3.9% increase in May, 3.8% increase in April and 10.9% surge in March. Gasoline prices dropped 9.7% on the month, marking the largest decline since August 2022 and unwinding a quarter of the spring run-up associated with the Middle East conflict. Still, gasoline prices remain 26.7% above their level a year ago.
  
  
• The easing in energy inflation extended beyond the pump and across household utility costs as well. Energy services prices declined 0.7% m/m, a notable reversal from the 0.4% and 1.6% increases in April and May. Electricity prices fell 1.0% – the largest monthly decline since 2019 – while utility piped natural gas prices increased 0.5%.
  
  
• Food prices rose a modest 0.2% m/m for a second consecutive month with grocery and restaurant prices both increasing 0.2%. Beneath the surface, food inflation remains uneven. Beef prices are up 11.8% y/y, fish and seafood prices are up 6.3% from a year ago and fresh vegetable prices are up 9.9% y/y. Offsetting some of these pressures, egg prices are down 27.9% from a year ago and dairy prices are up just 0.4% y/y.
  
  
• Core CPI surprised to the downside as it remained unchanged in June following a 0.2% m/m increase in May. The softness was broad-based, with declines in motor vehicle insurance, communication services, apparel, medical care and used vehicle prices offsetting modest gains elsewhere.
  
  
• Shelter inflation provided some meaningful relief in June. Shelter prices increased just 0.1% m/m, the smallest monthly gain since January 2021. Rent of primary residence increased 0.1% while owners’ equivalent rent rose a modest 0.2%. After firmer readings in April and May, the softer June print helps alleviate concerns that the housing disinflation trend may have been stalling.
  
  
• Transportation inflation eased last month. Airline fares rose only 0.2% m/m after climbing 2.7% in May, though they remain up a substantial 26.5% y/y. Motor vehicle insurance fell 2.0% m/m following a 1.7% decline in May while car rental prices jumped 5.1% m/m. The easing in fuel costs should continue to reduce pressure on transportation-related prices in the coming months.
  
  
• Core goods prices continued to soften and fell 0.1% m/m for a second consecutive month. Prices declined for apparel, used vehicles, appliances, communication equipment and medical commodities, while new vehicle prices were unchanged. This suggests that the tariff pass-through into consumer prices is gradually fading.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.