Even if inflation cooled in June, experts say price pressure isn’t over

Inflation in the United States eased slightly to 3.5% in June, according to preliminary reports, though the respite appears temporary given the recent resurgence in energy prices. The Bureau of Labor Statistics is scheduled to release the official consumer price index figures at 8:30 a.m. ET on Tuesday. While economists anticipate a modest decline in the headline inflation rate due to lower energy costs, concerns persist that the broader economic impact of persistent inflation may linger longer than expected. Energy prices had dropped significantly following the signing of a memorandum of understanding between the United States and Iran in mid-June, leading to a decrease in oil prices from the mid-$90s to approximately $70 per barrel. However, this downward trend has begun reversing. As of Monday, both U.S. crude and Brent crude oil benchmarks were trading above recent lows, with Brent reaching $80 per barrel. Analysts at Société Générale noted that renewed tensions in the Middle East, combined with the uncertainty surrounding the status of the memorandum of understanding, are putting upward pressure on inflation expectations. Storage facilities for oil have been depleted in an effort to manage prices, yet these levels have fallen to decades-low points. Refilling them with hundreds of millions of barrels of oil could lead to further price increases. Gasoline prices, a major indicator of inflation for consumers, initially saw a sharp decline from record highs but have recently stabilized at $3.79 per gallon, with a slight increase of 8 cents observed in the past week. Simultaneously, wage growth has slowed. Average hourly earnings rose by 3.5% in June, lagging behind the previous month's inflation rate of 4.2%. According to a survey by Dow Jones, economists predict a monthly drop in inflation by 0.2%, bringing the annual rate to 3.8%. This anticipated reduction is largely attributed to declining energy prices. May marked the peak of inflation since early 2023, fueled by the conflict with Iran, which triggered a global energy crisis. This led to increased oil and gas prices, along with higher bond yields affecting consumer borrowing costs. Transportation expenses, including airline ticket prices, have also climbed as a consequence. President Donald Trump has voiced frustration over the slow pace of declining gas prices, although experts suggest that the persistence of inflation extends beyond energy issues. Deutsche Bank economists warned of "price stickiness on the way down," predicting limited decreases in airline fares and delivery services based on upcoming reports. Rising bond yields mirror the increasing oil prices, reflecting heightened inflation expectations. The 10-year U.S. government bond yield, crucial in determining consumer interest rates, was around 4.57% on Monday, having previously dipped to 3.37% shortly after the memorandum of understanding was signed. This figure is nearing its highest point of the year. The rapid development of artificial intelligence systems and data centers globally is contributing to ongoing price pressures. Tech giants such as Microsoft, Amazon, Google, and Meta are aggressively acquiring memory components, causing a surge in demand and prices for essential parts used in devices ranging from smartphones to data centers. Apple recently announced price hikes for several flagship products, citing unprecedented increases in component costs. A company statement highlighted the extraordinary surge in demand for memory and storage driven by the expansion of AI data centers. Tech analyst Dan Ives described the situation as a "once-in-a-100-year storm," emphasizing the high cost of memory chips and the growing demand from AI infrastructure projects.