Revised blog post

Inflation finally moved in the right direction in June—but the details matter.

The Consumer Price Index fell 0.4% in June, the largest monthly decline since April 2020. Core CPI, which removes food and energy, was essentially unchanged. On a year-over-year basis, headline CPI slowed to 3.5% and core CPI slowed to 2.6%.

That sounds like a major win for the Federal Reserve, and part of it is. But most of the June headline decline came from energy. The energy index fell 5.7%, while gasoline fell 9.7%. In other words, removing oil and energy removes most of the outright deflation. The underlying consumer inflation rate did not go negative—it simply stopped rising for one month.

Producer prices tell the same story

The Producer Price Index fell 0.3% in June after rising 1.1% in April and 0.6% in May. Energy prices at the producer level fell 6.4%, and gasoline prices fell 12%. Once again, energy explains much of the reversal.

However, the underlying PPI measure—final demand less food, energy and trade services—still rose 0.1% in June. That was a major improvement from May’s 0.8% increase, but the underlying index was still 5.1% higher than one year earlier. The producer pipeline is cooling at the margin, but businesses are still dealing with substantially higher costs than a year ago.

PCE is why the Fed remains cautious

The Personal Consumption Expenditures price index is the Federal Reserve’s preferred inflation gauge because it covers a broader range of spending and adjusts as consumers change what they purchase.

The latest PCE report available today covers May. Headline PCE rose 0.4% for the month and 4.1% from one year earlier. Core PCE rose 0.3% for the month and 3.4% year over year. Those readings remain well above the Fed’s 2% target.

This timing difference is important: CPI and PPI already show June’s energy-price reversal, while PCE still reflects May—when oil and inflation pressures were stronger. The Fed therefore has encouraging new evidence from CPI and PPI, but its preferred gauge has not yet confirmed the same improvement.

What should the Federal Reserve do?

Based on the inflation data alone, the most defensible decision is to hold interest rates steady. Hiking immediately would risk reacting to an energy shock that may already be reversing. Cutting immediately would be premature while core PCE remains 3.4% and underlying producer inflation remains above 5%.

The better strategy is to wait for confirmation. The Fed should look for several more months of subdued core CPI, improving core PCE, slower services inflation and evidence that oil is not feeding into longer-term inflation expectations.

The labor market supports patience—not panic

The unemployment rate was 4.2% in June, compared with 4.0% in January 2025 and a recent high of 4.5% in November 2025. That is a softer labor market, but it is not the type of abrupt unemployment spike that normally forces the Federal Reserve into an emergency rate cut.

Initial jobless claims tell a similar story. Monthly average claims moved as high as approximately 239,000 in June 2025 but averaged about 222,500 in June 2026. The latest weekly reading was only 187,000 for the week ending July 18. Fewer people are filing new unemployment claims, even as monthly payroll growth has slowed.

This is why the Fed’s decision is difficult. Inflation is still above target, but employment is gradually losing momentum. Raising rates would increase the risk of unnecessary labor-market damage. Cutting too quickly could allow inflation to reaccelerate. A hold gives policymakers time to determine which risk is becoming more important.

What this means for mortgage rates

A Fed hold does not automatically mean mortgage rates will remain unchanged. Mortgage rates are driven primarily by the bond market’s expectations for future inflation, economic growth and future Fed policy.

If the Fed acknowledges the improvement in core CPI and signals that no additional tightening is necessary, Treasury yields and mortgage rates could receive some relief. If policymakers focus on elevated PCE and producer inflation—or warn that oil could reignite inflation—bond yields may stay elevated.

My expectation: the Fed holds today, recognizes the improvement in June inflation, but keeps its language cautious. The next important test will be whether June PCE confirms what CPI and PPI are beginning to show.