Consumer Price Index: Inflation at 3.5% in June

Inflation cooled for the first time in five months as the headline Consumer Price Index eased to 3.5% year-over-year. This marks a sharp deceleration from May's 4.2% reading, and was lower then the 3.8% forecast. On a monthly basis consume prices fell 0.4%, the largest monthly decline since April 2020 and more than the projected 0.1% decrease. The decline was largely driven by a fall in energy prices (-5.7%) which more than offset increases in other categories such as shelter (+0.1%) and food (+0.2%).

On a "core basis," which excludes volatile food and energy prices, prices rose 2.6% year-over-year and were flat month-over-month. Both readings were lower than their respective forecasts of 2.8% and 0.2%.

Key Takeaways

Headline inflation eased to 3.5% year-over-year while core inflation fell to 2.6% in June.
Headline prices fell 0.4% from May, driven by a 5.7% drop in energy prices.
Current market expectations show an 88% chance of a hold at the next Fed meeting versus a 12% chance of a 25 basis point hike.

Here is the introduction from the BLS summary, which leads with the seasonally adjusted monthly data:

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent on a seasonally adjusted basis in June after rising 0.5 percent in May, the U.S. Bureau of Labor Statistics reported today. This decline in the all items index was the largest 1-month decrease since April 2020 when it fell 0.8 percent. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment.

The index for energy fell 5.7 percent in June after rising 3.9 percent in May, 3.8 percent in April, and 10.9 percent in March. The energy index was the largest contributor to the monthly all items decrease, more than offsetting increases in other indexes including those for shelter and food. The index for food increased 0.2 percent over the month, as did the index for food at home and the index for food away from home.

The index for all items less food and energy was unchanged in June. Indexes that decreased over the month include motor vehicle insurance, communication, apparel, medical care, and used cars and trucks. Conversely, the indexes for recreation, household furnishings and operations, and personal care were among the major indexes that increased in June.

The all items index rose 3.5 percent for the 12 months ending June after rising 4.2 percent for the 12 months ending May. The all items less food and energy index rose 2.6 percent over the year, following a 2.9-percent increase over the 12 months ending May. The energy index increased 15.7 percent for the 12 months ending June. The food index increased 3.0 percent over the last year.

The first chart is an overlay of headline CPI and core CPI since the turn of the century. The highlighted two percent level is the Federal Reserve's target inflation rate. In June, headline prices eased from 4.25% in May to 3.53%. Meanwhile, core price pressures cooled from 2.85% in April to 2.59%.

The next chart shows both series since 1957, the year the government first began tracking core inflation.

Consumer Price Index Components

The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each, which is shown in the chart below. The BLS weighs these annually with the latest weighting taking place in December 2025.

The following table shows the annualized change in Headline and Core CPI (not seasonally adjusted) for each of the past six months. It includes the eight primary components and a separate entry for Energy, a collection of sub-indexes within Housing and Transportation. These breakdowns help illustrate how inflation impacts personal expenses based on individual exposure. For instance, the current volatility in energy and gasoline is clearly reflected in the Transportation component.

Here is the same table as above with month-over-month numbers (not seasonally adjusted).

Note: For additional information on the component composition of the Consumer Price Index, see our Inside the Consumer Price Index.

Inflation: Fed's 2% Target

The Fed is on record as having a target rate of 2% for core inflation. While the Fed traditionally uses the PCE Price Index as their preferred inflation gauge, the Consumer Price Index remains the most widely recognized measure. You can read our full analysis on how these two inflationary measures compare.

The Federal Reserve concluded its fourth meeting of the year by maintaining the federal funds rate at 3.50%–3.75%. The decision, which markets had fully priced in, keeps the benchmark rate at its lowest level since November 2022 for the fourth meeting in a row.

In their noticeably shorter statement from the meeting, the Committee noted, "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy." They stated that they will "deliver price stability."

The Fed will meet again next month where they are expected to hold rates steady. At the time of writing, the CMEFedWatch Tool shows an 88% likelihood the Fed will hold rates where they are versus a 12% likelihood of a 25 basis point hike.

Consumer Price Index: Inflation at 3.5% in June

Key Takeaways

Consumer Price Index Components

Inflation: Fed's 2% Target

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