Inflation fell more than expected in June as gas prices eased

Gas prices dropped in response to negotiations between the U.S. and Iran.

Inflation dropped more than expected in June as gas prices eased in response to negotiations between U.S. and Iran over the Middle East conflict .

Prices rose 3.5% in June compared to a year earlier, marking a retreat from a year-over-year inflation rate of 4.2% in the prior month, federal government data released on Tuesday morning showed .

The reading for June marks the lowest inflation since March, though the pace of price increases remains more than a percentage point higher than its pre-war level.

Last month, oil prices fell to their lowest level since before the late February outbreak of the Iran war. That drop came after a preliminary agreement included provisions aimed at resolving a global crude shortage.

A spike in oil prices over recent days amid a resumption of fighting , however, threatens to push gas prices higher, erasing some of the relief delivered last month.

Brent crude futures, the benchmark index for worldwide trading, rose to $86.90 a barrel on Tuesday. That figure stood roughly even with its level a month earlier, though it remained more than 20% higher than its pre-war level.

The inflation report on Tuesday offered some additional bright spots outside of energy prices.

Core inflation -- a measure of price increases that strips out volatile food and energy prices -- clocked at 2.6% over the year ending in June. That reading indicated a slight decline from the previous month, suggesting the cooldown had extended beyond gasoline.

Even after easing last month, overall inflation stands markedly higher than the Federal Reserve's target rate of 2%.

Speaking to a House committee on Tuesday, Fed Chair Kevin Warsh vowed to address elevated inflation.

"My colleagues and I recognize that high inflation has been an undue burden on American households and businesses," Warsh said, before noting that "volatilities and variations are inevitable, especially in an unsettled world."

Inflation spiked in the early 2020s in response to economic disruption wrought by the COVID-19 pandemic. Price increases eased significantly by 2024, but sped up in recent months as the Iran war choked off global oil supply. Over that entire period, inflation remained above the Fed's target rate.

"If we get policy right -- and I assure you, we will -- the inflation surge of the last five years will be a thing of the past," Warsh told lawmakers.

In roughly two weeks, the central bank will issue its next decision on the level of interest rates. The Fed is widely expected to hold interest rates steady, according to the CME FedWatch Tool , a measure of market sentiment.

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