June CPI Cools, But AI & Oil Risks Threaten Fed's Stance on Rates
June CPI is set to show inflation easing, driven by a temporary dip in oil prices. But don't get comfortable: renewed oil tensions and the AI boom's inflationary shadow could keep the Fed on a hawkish leash. Traders are eyeing the data for any shift in rate hike probabilities.
The June CPI drop is locked in for Tuesday, with headline inflation expected to cool. Forecasts point to a 0.1% monthly decline and an annual retreat to 3.8%, largely thanks to a temporary dip in crude oil prices. Core CPI, stripping out food and energy, is seen holding steady at 0.2% monthly.
This cooling was fueled by a brief US-Iran ceasefire, which sent oil prices plunging over 20% in June. But that relief rally is already dead. Since July, oil is back on the rise as US-Iran strikes resume, shattering the fragile truce and reigniting supply fears.
Adding fuel to the fire is the AI boom, a silent inflation bomb. Massive capital inflows into AI infrastructure, soaring industrial electricity costs, and premium pricing on tech hardware and LLM software are pushing core services and goods inflation higher. A recent Fed study even flagged a 73% annualized surge in "Computer Software and Accessories" PCE.
So, while June CPI might look soft, don't expect the Fed to pivot. Markets are already pricing a 30% chance of a July hike and a 77% probability of at least one rate increase by year-end. A single soft print won't derail a hawkish Fed facing persistent inflationary pressures.