June 2025 Inflation Report

Headline Numbers

The June 2025 Consumer Price Index (CPI) report showed a continuation of the disinflationary trend that began in late 2024, though progress remains uneven across different categories.

On a month-over-month basis, headline CPI increased by 0.2%, while core CPI rose by 0.3%, both slightly below consensus estimates of 0.3% and 0.4%, respectively.

Core Inflation Trends

The decline in core inflation to 3.2% marks the lowest reading since March 2021 and represents significant progress from the peak of 6.6% in September 2022. However, services inflation remains stubbornly elevated, particularly in shelter and transportation services.

Notable components of core inflation include:

• Shelter: +4.1% YoY (down from +4.5% in May)
• Transportation Services: +5.2% YoY (down from +5.8% in May)
• Medical Care Services: +2.8% YoY (down from +3.1% in May)
• New Vehicles: -0.5% YoY (first negative reading since 2020)
• Apparel: +1.2% YoY (down from +1.5% in May)

Key Drivers of Inflation

1. Shelter Costs

Shelter inflation, which accounts for about one-third of the CPI basket, continues to moderate but remains elevated. The Owners' Equivalent Rent (OER) component increased by 0.4% MoM, down from 0.5% in May, suggesting that the slowdown in market rents is gradually feeding into the official inflation data.

2. Energy Prices

Energy prices declined by 1.2% in June, with gasoline prices down 2.1% MoM. The energy component is now down 3.8% YoY, providing some relief to consumers.

3. Food Inflation

Food prices increased by 0.2% MoM, with food at home (grocery) prices up 0.1% and food away from home (restaurant) prices up 0.3%. On a YoY basis, food inflation stands at 2.5%, down from 2.8% in May.

4. Supply Chain Normalization

Continued improvement in global supply chains has helped ease price pressures for goods, particularly in categories like used cars (-1.2% MoM) and new vehicles (-0.2% MoM).

Fed Policy Implications

The June CPI report supports the Federal Reserve's current patient approach to monetary policy. With inflation continuing to moderate toward the Fed's 2% target, the central bank is likely to maintain its current stance of keeping interest rates steady in the 4.25-4.50% range.

Fed Chair Powell has emphasized the need for "greater confidence" that inflation is moving sustainably toward 2% before considering rate cuts. While progress has been made, the Fed remains vigilant about potential upside risks, particularly in services inflation.

Market Impact

Financial markets reacted positively to the softer-than-expected inflation data:

• Equities: S&P 500 futures rose 0.8% following the release
• Bonds: 10-year Treasury yield fell 5 basis points to 3.85%
• Dollar: DXY index declined 0.4% as Treasury yields fell
• Gold: Prices increased 0.6% to $2,450/oz

Sector performance was mixed, with rate-sensitive sectors like technology and consumer discretionary outperforming, while financials underperformed due to the decline in interest rates.

Looking Ahead

While the June CPI report shows continued progress on inflation, several factors could influence the trajectory in the coming months:

1. Labor Market Dynamics

Wage growth remains elevated at 4.2% YoY, which could continue to put upward pressure on services inflation. The June jobs report showed a slight cooling in job growth but a still-tight labor market.

2. Energy Prices

Recent increases in oil prices, driven by geopolitical tensions and OPEC+ production cuts, could reverse some of the recent disinflation in energy prices.

3. Shelter Inflation

With a significant lag between market rents and the shelter component of CPI, further moderation in shelter inflation is expected in the second half of 2025.

4. Consumer Spending

Retail sales data for June will provide important insights into consumer resilience amid elevated interest rates and moderating inflation.

Overall, while the disinflationary trend appears intact, the path to the Fed's 2% target may be bumpy. We continue to recommend a diversified portfolio approach with exposure to quality assets that can navigate various inflation environments.