Right before the release of the June report, Fed Governor Christopher Waller used notably hawkish rhetoric in his latest public address. He stated that if June’s was hot, the FOMC would need to consider tightening monetary policy in the near term.
That prompted traders to increase their bets that the FOMC might vote to raise at the Committee’s July 28-29 meeting. June’s CPI report was surprisingly cool. fell 0.4% m/m, marking the first monthly decline in six years (Fig. 4 below). The drop was driven primarily by a 9.7% m/m decline in (Fig. 5 below).
However, the moderation in inflation was broad-based. was unchanged m/m, core goods inflation fell 0.1%, and core services inflation was also unchanged (Fig. 6 and Fig. 7). The CPI measure of supercore inflation edged down to 3.1% in June.
While the June CPI report reduced the urgency for the Fed to raise interest rates, an assessment of the broader inflation picture suggests that at least one remains the base case for this year. Here’s why:
1. The Fed’s mission hasn’t been accomplished
remains well above the Fed’s 2.0% target and has remained above it for five consecutive years (Fig. 8 below). New York Fed President John Williams recently provided a useful framework for assessing when officials would feel more comfortable about the trajectory of inflation.
In his view, “a rate of of two-tenths a month in the second half of this year” would be consistent with a continuing disinflationary process. He also emphasized that “if it’s higher than that, that would be a sign of inflation a bit more persistent.”
Meanwhile, if inflation proves more persistent and meaningfully higher than his baseline forecast, “monetary policy would need to respond to that.” In other words, inflation readings above 0.2% m/m may result in a rate hike from the Fed.
2. Goods inflation faces meaningful upside risks
A few factors suggest that goods inflation may accelerate in the coming months. First, last year’s tariffs are still inflationary. Recent research from the New York Fed suggests that tariff-related inflation pressures remain in the pipeline, as nearly half of firms that have paid tariffs still plan additional price increases to offset higher costs, with some expecting to raise prices many months from now.
Second, the AI buildout has created significant demand for electronic components such as memory chips, servers, and networking equipment. The surge in demand for memory chips has pushed prices sharply higher, prompting Apple () to raise prices on certain MacBooks and iPads by roughly 15% to 25%.
Additionally, prices for computer software and accessories in the CPI have risen sharply in recent months, consistent with reports of growing AI-related demand across the technology supply chain (Fig. 9 below).
Similarly, import prices for all goods rose 6.6% during the first six months of the year and were up 7.1% y/y. Much of that increase has been concentrated in manufactured goods, where import prices rose 4.2% ytd and 5.0% from a year earlier. Within that category, import prices for computer and electronic products surged 7.4% during the first half of the year and were 8.0% higher than a year ago (Fig. 10 and Fig. 11).
Lastly, the New York Fed’s supply-chain pressure index suggests that global supply chains remain relatively disrupted, which historically has been associated with higher goods inflation (Fig. 12).
3. Underlying services inflation remains stubbornly high
Overall, May’s PCED service-sector inflation remains elevated at 3.8% y/y (Fig. 13). CPI and measures of consumer services prices rose 3.2% and 4.9% in June.
While the moderating shelter inflation rate we are expecting over the coming months should provide a disinflationary tailwind, we are concerned about core services excluding housing (Fig. 14). That measure remained sticky well before the outbreak of the Middle East conflict, and we think the resilience of the US economy will keep exerting upward pressure on it.
The June PPI report confirms this view, as it showed that the for final-demand services rose 5.1% y/y, suggesting that service-sector price pressures remain in the pipeline (Fig. 15 below).
4. Energy may no longer be a disinflationary tailwind
The decline in energy prices was an important disinflationary tailwind in June (Fig. 16). However, that support is fading fast. Oil prices have risen this month following the collapse of the US-Iran truce and renewed disruptions to traffic through the Strait of Hormuz.
The national average gasoline price has increased nearly 10 cents over the past week (Fig. 17 and Fig. 18). With tanker traffic through the Strait falling to its lowest level in two months and analysts warning that gasoline prices could soon return to $4 per gallon, energy may shift from being a source of disinflation to a renewed source of inflation pressure in the months ahead.
*This is an excerpt from our July 20, 2026 Morning Briefing for institutional investors.