All-items inflation fell 0.4% for the month; annual rates also dipped.
By David Enna, Tipswatch.com
U.S. inflation fell in June at a rate much deeper than expected, a big surprise. But current events in Iran make this dip look “transitory,” an over-used word that seems appropriate today.
In June, the Consumer Price Index decreased 0.4% on a seasonally adjusted basis after rising 0.5% in May, the Bureau of Labor Statistics reported this morning. This was the largest 1-month drop since April 2020. Annual all-items inflation fell to 3.5%, well down from the 4.2% reported for May.
Core inflation, which removes food and energy, was flat for the month and the annual rate fell from 2.9% in May to 2.6% in June.
All these results were well below economist expectations, so the June report should be viewed as highly positive. But events of the last week — with the Strait of Hormuz again closed and U.S. launching nightly attacks on Iran — make the situation highly volatile.
A key factor in the June report, of course, was a 9.7% drop in gasoline prices, which remain up 26.7% year-over-year. The energy index was the largest contributor to the monthly all items decrease, the BLS said. This deflationary trend is highly likely to reverse in July and August. More from the report:
- Food at home costs rose 0.2% in June and are up 2.7% for the year.
- The meats, poultry, fish, and eggs index increased 0.6% over the month.
- The cost of eggs increased 4.3%.
- Costs for fruits and vegetables fell 0.2%.
- Shelter costs increased just 0.1%, but are up 3.3% for the year.
- Apparel costs fell 0.6% but are up 3.9% for the year.
- Costs of new vehicles were flat and are up only 0.5% for the year.
- Prices for used vehicles fell 0.2% and are down 1.8% for the year.
- The motor vehicle insurance index declined 2.0% in June after falling 1.7% in May.
- Airline fares rose 0.2% but were up 26.5% for the year.
Most of this looks routine, except for the deep decline in gas and energy prices. That may end up being a one-month story. However, the slowing of shelter inflation and drop in annual core inflation have to be viewed as positives. Here is the trend in all-items and core inflation over the last year:
What this means for TIPS and I Bonds
Investors in Treasury Inflation-Protected Securities and Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds. For June, the BLS set the inflation index at 333.952, a drop of 0.35% from the May number.
For TIPS. The June report means that principal balances for TIPS will fall by 0.35% in August, after rising 0.63% in June. Here are the new August Inflation Indexes for all TIPS.
For I Bonds. The June report is the third of a six-month string that will determine the I Bond’s new variable rate, to be reset November 1. So far, inflation has increased 1.13% over the three months, which translates to a variable rate of 2.26%. But three months remain. Expect lots of volatility. Here are the numbers so far:
What this means for future interest rates
If we could ignore the inflationary events of the last week, I’d say this June report would — at the least — allow the Federal Reserve to put future short-term rate increases on hold. But keep in mind that both all-items (3.5%) and core inflation (2.6%) remain too high for comfort.
If the situation in Iran continues to escalate, we will see higher gas prices, possibly steadily higher as the summer months continue. Higher gas prices obviously trigger higher immediate inflation, but also cause other consumer spending to decline. Fed actions on short-term interest rates will have little effect on that.
Today’s report led investors to sharply lower the chances that the Federal Reserve will raise rates at its July 28-29 meeting, the Wall Street Journal reported. Before the report, futures markets implied there was a close to 40% chance of a rate increase. That dropped to about 15% this morning.
I agree the Fed is again on hold until this situation clarifies (if it ever clarifies). Fed Chairman Kevin Warsh, in remarks prepared for House testimony this morning, had this to say:
“The members of our committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability. … If we get policy right — and we will — the inflation surge of the last five years will be a thing of the past.”
Later, during testimony, Warsh was asked if the June inflation report changed his view on future inflation. He said:
“I don’t want to over-read or cherry-pick data. There might be some that look at this morning’s data and say, ‘Oh, mission accomplished. Everything is swell.’ That is not my view.”
This is encouraging and would indicate the Fed will at least consider hiking rates if inflation continues rising. This is from Bloomberg’s morning report:
“The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds, but we remind investors that almost every communication that has emanated from Chair Warsh during his short tenure so far has been hawkish,” said Skyler Weinand at Regan Capital.
“Although a path remains for rates to stay unchanged this year, the re-escalation of the conflict has narrowed it,” he said.
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Treasury Inflation-Protected Securities 
I just noticed on Fidelity that a number of the outstanding TIPS are now showing real yields in excess of 3%.
At yesterday’s close, every TIPS maturing in 2047 or later was creeping close to 3%. Yields are higher today. Today’s auctioned 10-year could hit 2.40% or higher, depending on demand.
David,
Prior to these economic reports I was contemplating participating in this weeks 10 year TIPS auction. The good: the real yields. The bad: I don’t trust the BLS under the current administration. But given the initial .4% monthly principal decline that a auction buyer would suffer, isn’t the better strategy to wait to purchase in the secondary market later in the month (assuming the investor is of the belief that market interest rates/outlook are likely to be similar to today’s at that later point in time)?
My strong belief is that this complex TIPS market has already adjusted pricing to reflect the -0.35% decline in principal coming in August. That is highly likely to reverse in September. As for the BLS, I not worried (yet). Staffing levels are awful, but the acting director is a longtime BLS statistician. In the five months before the June decline (Jan to May) non-seasonally-adjusted inflation increased 3.37%. That’s an annual rate of about 7%.
David, have you ever done a blog post on the topic of I-Bond beneficiaries? Thirty years ago when I bought my first Bonds I really didn’t think much about the issue other than to include my spouse on mine and me on hers. Now, at 80, we are working through a new trust for our children (including a sub-trust for one child) for our other assets but have never addressed the I-Bonds. It would be interesting to know your thoughts of how to add the children before I try to include the Bond in the trust.
In the recent TIPS vs I Bonds article I posted about my experiences using beneficiary designations and how it was no hassle for heirs.
If you and spouse are co-owners, to avoid the change being a taxable event, wait until one passes then have the deceased removed (paperwork involved). Once that is done, you add a beneficiary for each bond, which can be done online in Treasury Direct. The rest is explained in my post.
If you are the owner and your spouse is beneficiary, I believe you can remove the current beneficiary and name a new beneficiary, again, bond by bond. Can be done online for bonds held in Treasury Direct.
Paul, once you get the trust set up, simply open a Treasury Direct account in the name of the trust. Then transfer the I-Bonds to the trust. The trust will then continue after you both pass and the NEW trustee will administer the trust per your instructions in the trust. In the meantime, you and your spouse would be the trustees controlling the bonds.
My wife and I did establish a joint trust for I Bonds at TreasuryDirect.
In May 2025, TreasuryDirect acknowledged receipt of our paperwork to move I Bond holdings from our individual accounts to the joint trust account and assigned a “case number” to the request. Due to chronic understaffing at TreasuryDirect, probably worsened by the current administration’s attacks on the federal civil service, over 14 months have now passed, and we’re still waiting for those transfers to happen.
A few days ago I called TreasuryDirect, as I’ve done previously a couple times during those 14 months, to ask, referencing the case number, if the requests were still on file and if there was any problem. Answer: No problem, just waiting in the queue for a Treasury examiner to get to them.
I then asked: “Suppose that all the I Bonds were already in the joint trust account but then my wife and I both died. The successor trustee would then want to completely liquidate the joint trust’s I Bond holdings as part of settling the estate. Could that type of action be accomplished any more speedily than this because it involves an estate? Or would the trustee encounter a similar prolonged wait for processing of those estate-related actions?” Answer: a similar wait.
We continue to own I Bonds because we find them attractive and because TreasuryDirect is “the only game in town” for buying them. But I have no confidence that creating a trust, or naming I Bond beneficiaries in advance, necessarily makes anything easier, i.e., less time-consuming, for TreasuryDirect customers hoping to simpify things for whomever will be cleaning up their post-demise financial affairs.
TipswatchChat, I can’t argue with your experience, only share mine.
Chronic understaffing? My most recent estate/beneficiary experience was only a few years ago. Similarly, just prior to the pandemic, a few years prior to that and a few years prior to that. All handled in just a few months.
I suspect there is a big difference in the review required involving trusts, based on my experience elsewhere with trusts, vs removing a deceased from a bond (simple form, and death certificate). The latter is a very straightforward transaction. Bond is owned by deceased with a named beneficiary, details match death certificate, beneficiary has requested the bonds be transferred to their existing Treasury Direct account. Their details match up. So simple even a caveman could do it!
Even if it worked for me then, it might not now! Which is true of every single estate transaction. The premise that estate plans will be followed, or that the institutions involved will go along or do things correctly, is greatly overstated. The best way to ensure your assets are distributed as you wish is to do it while you are alive, to the extent you can.
We currently have a trust account at Treasury Direct that we have been trying to move securities out of to our Fidelity trust account. We are now on month 13 of their receipt of our request and when I inquired as to when our request would be processed, all we received in reply was that our case had not yet been assigned. This experience opened my eyes to the understaffing at Treasury Direct. I do not want my children to have to deal with the nightmare that it is becoming. It may take a few years but we are intent on not leaving anything, not even ibonds, in our TD trust account for our heirs/children.
Priscilla, we’ve begun to think about the same thing, for the same reason.
We’ve been slowly constructing a TIPS ladder, and had originally thought of the I Bonds as the core inflation instrument and the TIPS, in a lesser amount, as “in addition to.” But now wondering if we should think of the TIPS as “instead of” and begin enlarging the TIPS holdings as we drawn down the I Bond holdings.
In terms of investment characteristics, TIPS have certain disadvantages compared to I Bonds, but other considerations also enter the picture, i.e., (1) The TIPS holdings are readily visible in brokerage account statements and don’t present the TreasuryDirect issue of having to create one’s own “paper trail” to prove the existence of an I Bond portfolio. (2) Which means that an executor or trustee will have no difficulty accessing them quickly at the brokerage for estate settlement purposes, without having to endure TreasuryDirect’s extraordinary wait times for account actions requiring an employee. And (3) in our case, the TIPS are all in Roth IRAs, so that, whatever their inflation-adjusted value may eventually turn out to be, and whatever their interest payouts over the years, no further taxes will be due on the investment.
It took us a long time to accumulate our I Bond holdings, and we never want to do anything hasty, so still mulling it over.
Could not agree more! Thank you for your comment, Priscilla. No need to leave the kids a multi-month/years mess to handle.
Looks like we are seeing some of the best Real yields on TIPS, especially longer dated, in many years right now.
When Warsh says “if we get the policy right” it assumes the Fed’s policy tools can set the level of inflation. They cannot. In fact, the Fed’s tools are now largely impotent in my opinion, and recent experience supports that.
Inflation is a result of many other factors that won’t respond to interest rate increases or declines. The Fed previously referenced supply shocks, but there is so much more. Health care utilization is up, likely in part due to longer effects of the pandemic. Changing climates leads to more damage and disruption, and higher or unavailable insurance. AI is driving up costs for electronics, electricity, and getting first dibs on water. (Did you know in Taiwan last year they cut off water to households one week a month to make sure the semi fabs had enough water?) Will the Fed interest rate impact any of those? No.
There are many other factors as well.
One point rarely discussed: lower rates are presumed to be stimulative, and higher rates restrictive. Yet according to Fed data, we collectively hold more interest earning assets than interest bearing debt. So lower rates collectively reduce income more than they reduce expenses. Is that stimulative?
There are a lot of interactions, of course, like the stock market and interest on the national debt. Deficit spending is profit to somebody; a shrinking deficit gores somebody’s ox.
Achieving targeted inflation is far beyond the ability of the Fed, though if it reaches target they will claim victory even if it was not their actions that resulted in achieving the target. The great and powerful Oz!
There’s a little parable about the rooster who’s under the mistaken impression that his crowing produces the sunrise.
There’s a lot of that kind of post-hoc-ergo-propter-hoc thinking, in both the public mind and the Fed’s own, about what effect the Fed can or cannot achieve on general economic conditions.
The core inflation numbers are reassuring. If you strip out energy, the inflation numbers these past few months are not so bad. The trend seems to be going in the right direction. The key is we don’t repeat the same mistakes we made during Covid (no more trillion dollar stimulus bills) and we don’t take down interest rates too fast to goose the economy or the labor market.
Lou, I agree. We are finally seeing shelter slip lower and the high gas prices hold down other spending. But … I think no tax on tips, no tax on overtime and the higher senior deduction are stealthy stimulus.
I am not a fan of the tax deductions to which you referred but I think a tax cut is less stimulative than a corresponding increase in spending and causes less inflation. The reason is because spending enters the economy as an immediate increase in aggregate demand while tax cuts are not entirely spent right away because in some cases they are used to pay down debt or increase savings.
You should try telling your waiter or waitress there at the Open Kitchen that you think they don’t pay enough in taxes. Get back to us on what their response is.
A few months ago I was eating lunch at a restaurant and I asked the waiter about “no tax on tips” for his 2025
return. He said he got no benefit from it; the restaurant didn’t list his tips separately, or he just didn’t realize what he was seeing. I was amazed.
David, in the 3rd paragraph did you mean “2.6% in June” instead of “July”. Thanks for your insights on inflation and TIPS.
Yes, I did. Thank you for the alert.
PPI numbers are tomorrow morning (July 15th) at 8:30AM.
Those are the numbers I expect to tell more of the story.
So the result is final demand is 0.3% lower and now down to +5.5% over 12 months … since energy dropped 6.4% compared to the previous month.
Take food and energy back out and it’s still up 0.2%. Less than the 0.7, 0.7 0.3, 0.4 and 0.7 for the prior months of 2026.
We’re still in the “wait and see” phase to see if future core PPI increases will be kept in check, but core PPI remaining above 5% for prolonged periods will have obvious downstream impact going into 2027 and beyond.
Let’s revisit this in 3 months when energy prices will better indicate their long-term reaction to the ongoing supply shock and volatility.
At least for myself, it’s unlikely I-Bond fixed rates will go down, especially as there’s folks like Waller reversing their position. I’ll likely be making my purchase in November, to then be patient again in 2027.
Just got 2.9% YTM. You can pry this bond out of my cold dead fingers, literally.
07/14/2026
Buy 912810UH9UST INFL IDX 2.375%02/55INFL INDEX DUE 02/15/5510,000$89.8398-$9,612.63
David, thank you for your post. Instead of disinflation, would you say that the month of June was a period of deflation, not disinflation? As I understand the word, disinflation happens when the inflation rate falls but remains positive. Prices are still rising, but at a slower rate than before. So, disinflation would apply for the prior 12 month period but the single month of June was actually deflation. Clearly the annual inflation rate of 3.5% is well above the 2% target, but it’s worth noting that although the name of the group remains the same (Federal Reserve), the leadership is different and perhaps the current chairman will show a little more humility than his predecessor and avoid repeatedly choosing to use the word transitory.
I said disinflation because core inflation dropped to 0.0%, not negative. All-items did technically go into one month of deflation, caused almost completely by one index: energy. Either term could be used to describe June.
As of 10 am 14 Jul 26 the 10 Year TIPS is indicating a yield of 2.31% and the 5 is 2.01%. The next 10 Year TIPS auction will be on 23 Jul.
Fasten your seatbelts, it’s going to be a bumpy night.
So … the exact same group has no tolerance for what they’ve been tolerating for 5 years? Duly noted!
I believe those reported numbers, too. Really! I mean, what reasons have we been given NOT to trust them?
Everything is fine.
I have to agree with your skepticism. My day to day experience is not that prices are dropping, except for gas which I rarely buy. And I don’t trust anything the Trumpified Bureaucracy puts out statistically nowadays. The “Full faith and trust of the US Government” has been qualified to me in the past 18 months, and I’m seriously questioning whether my investments in TIPS will be manipulated by the Federal Government’s data collection to skew in the Treasury Department’s favor. Our system has been built on trust and now I personally am losing it.