Americans may have caught a rare break from rising prices last month as falling gas costs helped push inflation lower. But the relief could be short-lived, with renewed tensions involving Iran sending oil prices sharply higher and threatening to reignite inflation.
A government report due Tuesday is expected to show consumer prices fell 0.2% in June, according to economists surveyed by FactSet. If confirmed, it would mark the first monthly decline in inflation in nearly four years. Annual inflation is forecast to ease to 3.9% from 4.2% in May.
Gas prices continued edging lower through July, pointing to another modest improvement next month. But those gains are now at risk as conflict in the Middle East rattles global energy markets, keeping affordability a major political headache for the Trump administration ahead of the midterm elections.
On Monday, Brent crude, the global oil benchmark, jumped 9.6% to $83.30 a barrel after both the United States and Iran asserted control over the Strait of Hormuz. Higher oil prices have already begun to feed through to airfares and diesel costs, raising the cost of shipping groceries and other everyday goods.
Economists are also watching for signs of price pressure elsewhere. Hotel rates likely rose as World Cup matches brought visitors to 11 U.S. cities, while prices for new and used vehicles are expected to have eased. At the same time, the cost of services such as restaurant meals, entertainment and health care continues to rise faster than before the pandemic.
Excluding food and energy, so-called core inflation is expected to increase 0.2% in July and 2.8% from a year earlier. Sustained increases at that pace would move inflation closer to the Federal Reserve's 2% target.
A cooler inflation report could ease pressure on the Fed to raise interest rates, but policymakers remain wary after inflation has stayed above target for more than five years.
Fed Chair Kevin Warsh has reiterated the central bank's commitment to bringing inflation back to 2% without signaling its next move. Other officials have warned another rate hike could still be on the table if inflation refuses to cool.
New York Fed President John Williams said last week that monthly core inflation readings of 0.2% or less would be consistent with inflation continuing to decline.
Fed Governor Christopher Waller struck a more cautious tone Monday, noting the Fed's preferred measure of core inflation had climbed from 3% in December to 3.4% in May. More than two-thirds of service prices are still rising at least 3% annually, he said.
"If we get another hot reading on core inflation this week, then the (Fed) will need to consider tightening monetary policy in the near term," Waller said.
Officials are also keeping an eye on massive investments in artificial intelligence infrastructure, which are driving up demand for semiconductors, memory chips and electricity. Companies including Apple, Microsoft and Dell have already announced price increases on laptops, tablets and gaming consoles.
Gas prices, meanwhile, are climbing again. After falling nearly 20% from their late-May peak, the national average rose to $3.87 a gallon Monday, up 7 cents from a week earlier, according to AAA, though still below the $4.09 average a month ago.
Other indicators paint a mixed picture. A recent New York Fed survey found nearly half of businesses paying tariffs still plan to raise prices further. Walmart, however, announced price cuts on thousands of products, including ground beef, potato chips, toys and clothing. President Donald Trump praised the retailer on social media and sought to claim credit for the reductions, though Walmart did not attribute the cuts to the administration.
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