The dollar has plunged, and risk assets have risen. This was the reaction to the U.S. June inflation report, which delivered the strongest disinflationary surprise to the market in recent times.
According to the data, the overall Consumer Price Index (CPI) rose by only 3.5% year-over-year, significantly missing the forecast of 3.8% and sharply slowing from May's 4.2%. The month-on-month dynamics are even more telling: prices decreased by 0.4% when only a 0.1% decrease was anticipated, while a 0.5% rise had been recorded in May. The core measure, which excludes volatile food and energy prices and is considered the most accurate indicator of sustained price pressure, surprised the market just as much.
Compared with the previous month, the core CPI showed no change, coming in at exactly zero instead of the expected 0.2%. Year-on-year, core inflation slowed to 2.6%, down from a forecast of 2.8% and May's 2.9%.
The extent of this surprise is particularly significant against the backdrop of what was happening in the markets just before. Just yesterday and the day before, traders were feverishly raising expectations for rate hikes by the Bank of England, the European Central Bank, and the Federal Reserve amid a sharp rise in oil prices and the escalation between the U.S. and Iran, with Brent pushing the $90-per-barrel mark. Fed Governor Christopher Waller had recently warned that the central bank might need to tighten policy if core inflation continued to signal broad price pressures. The June CPI directly contradicts this assertion, showing that at least at the time of data collection for June, price pressure was, in fact, easing.
It is important to consider the time lag here. The June data reflects the situation before the most critical phase of the current escalation around the Strait of Hormuz, which unfolded in July, when Trump renewed the blockade on Iranian vessels, and oil surged to multi-month highs. In other words, today's report is a snapshot of the economy at a moment when the military premium in energy prices had not yet fully materialized, and earlier de-escalation continued to exert a disinflationary effect.
This makes interpreting the data particularly delicate: the market received a strong signal indicating cooling inflation just as fresh geopolitical events were beginning to create new inflationary pressures, which will only manifest in the July and August figures.
The timing alignment with Warsh's comments adds special weight to the data. In his speech before Congress, the Fed Chair stated that committee members will not tolerate persistently high inflation and share a determination to restore price stability while keeping the rate in the 3.50-3.75 percent range.
