Inflation cooled significantly in June, marking the largest monthly decrease since early 2020, driven largely by a sharp drop in energy costs after the reopening of the Strait of Hormuz eased oil supply pressures. The Consumer Price Index (CPI) rose 3.5% over the past year, down from 4.2% in May, according to the latest data from the Bureau of Labor Statistics.

On a monthly basis, prices fell by 0.4%, a larger decline than anticipated by economists who expected a more modest 0.2% drop. The resumption of tanker traffic through the critical shipping route helped push U.S. crude oil prices down by roughly 25% in June, which in turn led gasoline prices to plunge nearly 10%, tempering headline inflation numbers.

Despite these improvements, the core CPI—which excludes volatile food and energy categories and is closely watched by the Federal Reserve—remained elevated at 2.6%, still above the central bank’s 2% inflation target. This suggests persistent underlying price pressures even amid the easing in energy costs.

The recent decline in inflation offers only temporary relief, as geopolitical tensions in the Middle East have reignited, raising the risk of further volatility in energy markets. Following a breakdown in diplomatic efforts, leading political figures have signaled a resumption of hostilities, contributing to uncertainty over future price trends.

Financial markets and policymakers now closely watch Federal Reserve Chairman Kevin Warsh, who is scheduled to testify before the House Financial Services Committee. Investors look for indications on whether the Fed will maintain its current interest rate stance or resume tightening measures to combat inflation.

Fed officials remain divided on the path forward, caught between concerns that pausing rate hikes could prolong inflation and fears that continuing to raise rates too aggressively might slow economic growth prematurely. While some members are cautiously optimistic, others emphasize the need for several months of sustained inflation declines before adjusting policy direction.

Additional factors contributing to the softening June inflation include a notable 0.6% monthly decrease in apparel prices and a slowdown in automotive price gains, both of which helped moderate overall consumer price increases.