A Break in the Heat: June CPI Gives the Fed Breathing Room

• The average price for a gallon of gasoline fell almost 10% in June.

• Regional Fed prices received data showed a decline last month.

• The scenario could drive real rates back up.

The inflation picture is beginning to look up…

This week delivers a key update for investors tracking the Federal Reserve’s monetary policy outlook. The U.S. Bureau of Labor Statistics (“BLS”) will release its June Consumer Price Index (“CPI”). And if you’ve filled up your tank recently, you know that prices have experienced a big drop.

According to the Energy Information Administration (“EIA”), the average gallon of gasoline last month cost $4.18. That’s up compared to the same time last year, but it marked a sharp decline compared to May. According to my calculations, gas prices dropped almost 10% on a month-over-month basis in June…  

As the chart above shows, the first half usually delivers most of the seasonal price growth. But this past month was far below the typical 1.1% gain for June. The move pushed the Cleveland Fed’s staff to project headline CPI could fall to 3.9% compared to 4.2% in May. That should soothe Wall Street’s anxieties about whether rate hikes will enter the discussion.

Chairman Kevin Warsh has signaled our central bank is willing to be patient. Recent commentary from other policymakers indicates their anxieties are up, but they’re hoping a resolution to the Iran conflict will keep weighing on oil prices and inflation growth. Based on the data I track, the recent jump in energy costs hasn’t yet filtered into broader goods and services prices. That gives the Fed room to stay on hold.

But don’t take my word for it, let’s look at what the data’s telling us…

To get an idea of what inflation growth might look like each month, I built a gauge using monthly manufacturing and services index data from the Dallas, Kansas City, New York, and Philadelphia Fed districts. These surveys ask businesses whether activity is rising, falling, or holding steady, and then publish indexes to capture the change. Together, these regions represent roughly 32% of national economic output. I focus on the “prices received” components because they serve as a proxy for CPI.

Each district is weighted by its contribution to national growth, giving us a cleaner read on how they influence the overall picture.

• In June, the combined manufacturing prices‑received index came in at 29.7.

• That was down from 31.3 in May.

• That’s around levels experienced in mid-2025 when CPI hovered near 3%…  

Manufacturing, accounts for about 10% of domestic output. Services matter far more. That sector includes healthcare, education, finance, hospitality — the parts of the economy where most Americans work and spend.

• My gauge shows the services index held steady at 19.4 in June.

• That compares to 20.5 in April.

• That’s still within the range of recent outcomes.

Next, I blended the two measures, weighting them by economic importance and their relevance to CPI. Because services dominate the U.S. economy, they carry more sway in the combined reading.

• The composite came in at 23 for June.

• That compares to 23.5 in May and 24.2 in April.

• This is above the recent range, but it’s cooling.

This matters because it tells the Fed that companies are raising prices on consumers, but the pace is slowing. They’re likely passing on the elevated fuel costs from the last few months. In fact, the details show Dallas and Philadelphia were the bulk of the increase, while gauges eased in Kansas City and New York. This gives policymakers the ability to remain on hold with interest rates. But their tolerance is likely wearing thin if prices keep surging.

So, the last step is to measure the Fed’s interest rate cushion. We can do this by looking at the real rate of interest (effective federal funds rate minus inflation). A positive number means policy is weighing on price growth, while a negative number means rates are stoking inflation. According to the most recent CPI figures, rate hikes aren’t yet necessary…

In May, the effective federal funds rate was roughly 3.6% while inflation stood at 4.2%. That means policy is about 60 basis points below the so‑called neutral level, where rates neither help nor hinder growth. And since the Fed has managed the real rate to an average of –0.6% since 2000, it implies policymakers have reached that long‑term norm.

Now let’s apply the Cleveland Fed’s 3.9% CPI estimate for June. Under that scenario, the current rate‑cut cushion rises to just -0.3%. When we factor in the long‑term average, it tells us the Fed regains some wiggle room.

Bottom line: the margin for rate cuts is thin. The Fed still has room to stay on hold, but policymakers’ anxieties are up. However, if the situation in the Middle East is being resolved, the door to lower borrowing costs could open back up next year.

There’s also reason for additional optimism. Gas prices have already pulled back further in July. The national average so far is down more than 6% compared to June. That has led the Cleveland Fed to estimate annualized CPI will pull back to 3.7%. Such an outcome would provide our central bank with more rate-cut cushion, or the gap between real rates and the long‑term real neutral level. The shift would help sustain a steady, long‑term rally in the S&P 500.

Five Stories Moving the Market:

For the Iranian regime, keeping a chokehold over the Strait of Hormuz has turned out to be more important than the tens of billions of dollars in sanctions relief from the Trump administration; Iranian officials believe the country has finally emerged as a regional hegemon, after the U.S. and Israel failed to achieve their main goals in the war they unleashed in February – WSJ. (Why you should care – a push by Iran to control the Strait of Hormuz is likely to complicate negotiations with the U.S.)

The United States was carrying out another round of strikes on Iranian targets, according to the U.S. military, extending a pattern of attacks between the two sides as their fragile cease-fire continued to unravel; it was the second volley of U.S. attacks in a matter of hours that were intended to stymie Iran’s ability to attack commercial ships in the Strait of Hormuz – NY Times. (Why you should care – the U.S. is responding to new attacks by Iran on civilian ships trying to transverse the Strait of Hormuz)

Russian gasoline output fell to a level equivalent to only around 65% of the ​seasonal average consumption after Ukrainian drone attacks led to stoppages at large oil refineries, according to two industry sources ‌and Reuters calculations – Reuters. (Why you should care - Ukraine’s increasing battlefield success is likely raising pressure on Moscow to end the war, potentially freeing up additional global energy supply)

The European Union is developing a “solidarity instrument” to support companies that diversify critical supplies away from China and cushion the impact of any retaliation by Beijing in the event of a trade conflict – Bloomberg. (Why you should care – the EU is unhappy with is $411 billion trade deficit with China)

Apple sued OpenAI and two former employees, alleging misappropriation of its trade secrets to ​benefit the ChatGPT-owner's foray into consumer hardware, a dramatic escalation of already simmering tension between the two companies – Reuters. (Why you should care – the lawsuit sets up a battle for who will control future AI devices)

Economic Calendar:

Norway – CPI for June (2 a.m.)

Fed’s Bowman (Board Member, Voter) Speaks (5:25 a.m.)

OPEC Meeting (6 a.m.)

Treasury Auctions $92 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $79 Billion in 26-Week Bills (11:30 a.m.)

Fed’s Waller (Board Member, Voter) Speaks (12:30 p.m.)

ECB’s Schnabel (Executive Committee) Speaks (12:45 p.m.)

BoE’s Pill (Chief Economist) Speaks (2 p.m.)

U.S. – Federal Budget Balance for June (2 p.m.)

ECB’s Lagarde (President) Speaks (5 p.m.)