US Inflation Falls to 3.5% in June—First Decline in Five Months, Below Expectations
Consumer inflation dropped sharply to 3.5% annually in June, down from 4.2% in May, as energy prices fell following a temporary ceasefire with Iran. Core inflation also eased to 2.6%, providing relief after three consecutive months of acceleration and suggesting the Fed may hold rates steady.
June Inflation Report Exceeds Expectations with Sharp Decline
The annual inflation rate in the US fell to 3.5% in June 2026, the first decline in five months, compared to 4.2% in May and below forecasts of 3.8%. The consumer price index fell a seasonally adjusted 0.4% for the month, bringing the annual inflation rate down to 3.5%, and the monthly drop was the largest since April 2020.
Energy Costs Drive the Decline
Energy costs increased 15.7%, below 23.5% in May, as the ceasefire between the US and Iran alleviated inflationary pressures from the energy component. The easing of prices came from a big decline in energy and an easing in services costs, particularly for housing. Inflation also slowed for shelter (3.3% vs 3.4%) and food (3% vs 3.1%).
Core Inflation Eases Significantly
Annual core inflation eased to 2.6% from 2.9%, below forecasts of 2.8%. Core inflation, which excludes food and energy, was flat on the month, putting the 12-month rate at 2.6%, while the consensus forecast was for respective increases of 0.2% and 2.9%. This marks meaningful progress toward the Federal Reserve's 2% inflation target.
Fed Policy Implications Amid Geopolitical Uncertainty
The year-over-year inflation rate dropped from 4.2% in May, to 3.5%, and it helped that gas prices fell nearly 10%, as the Iran war temporarily waned. However, some of that's been reversed already now that the U.S. and Iran are trading strikes again. The surprisingly strong CPI numbers mean the Fed is likely to hold interest rates steady at its next meeting in July.