US inflation slows, but the battle isn’t over yet

June inflation came in lower than expected

US inflation eased in June, with the Consumer Price Index (CPI) rising 3.5% year-on-year (YoY), down from 4.2% in May and below the consensus forecast of 3.8%. The moderation in headline inflation was primarily driven by slower energy price growth following the earlier ceasefire between the US and Iran, which helped ease oil prices. Energy prices rose 15.7% YoY, down from 23.5% in May, with gasoline inflation slowing to 26.7% (from 40.5%) and fuel oil inflation easing to 42.9% (from 58.9%). Food inflation also moderated slightly to 3.0% from 3.1%.

Core CPI, which excludes the more volatile food and energy components, also cooled to 2.6% YoY from 2.9% in May, coming in below the consensus forecast of 2.8%. The moderation was broad-based, with shelter inflation—which accounts for about one-third of the CPI basket—easing to 3.3% from 3.4%. Price increases also slowed across categories such as household furnishings and supplies (1.3% vs. 2.4%) and apparel (3.9% vs. 4.8%), suggesting underlying inflationary pressures softened.

Figure 1: US inflation decelerated in June as energy prices ease

Inflation is likely to remain above the Fed's 2% target over the next year

June's inflation report suggests that inflation may have peaked back in May, with price pressures easing across a broad range of categories. Shelter inflation, which accounts for around one-third of the CPI basket, could continue to moderate, with leading indicators such as the Zillow Rent Index (1.9% in May) remaining well below current shelter inflation (3.3% in June). Wage pressures also remain contained, with real average hourly earnings and real average weekly earnings rising by just 0.1% and 0.3% respectively, suggesting that wage-driven inflation is unlikely to re-emerge in the near term.

That said, we believe the path back to the Federal Reserve's 2% inflation target is unlikely to be smooth, with inflation likely to remain above target over the next year. The decline in energy prices that supported June's inflation report—driven by the earlier ceasefire between the US and Iran—may prove short-lived as geopolitical tensions in the Middle East have resurfaced. The ceasefire collapsed after commercial tankers came under attack in the Strait of Hormuz, triggering renewed military strikes between the US and Iran and pushing oil prices to a four-week high. As a result, gasoline prices have already begun rising again, with the national average increasing to USD 3.86 per gallon from USD 3.79 a week earlier. Further increases are likely following Washington's decision to reimpose a naval blockade on Iran, which helped lift oil prices to their highest level in four weeks.

Figure 2: Energy prices have picked up as tensions flare

Beyond energy, the inflationary impact of higher input costs may not yet be fully reflected in consumer prices. Food inflation, for instance, is likely to face further upward pressure as farmers pass on the higher fertiliser costs incurred during the current planting season. Some may also reduce planting where production is no longer economically viable, resulting in tighter agricultural supply and higher food prices in the months ahead. Meanwhile, higher transportation costs resulting from elevated fuel prices are also likely to place upward pressure on a broad range of consumer goods.

Separately, structural demand from AI investment could continue to support inflation. In its Monetary Policy Report to Congress, the Federal Reserve identified AI-related spending as a source of price pressures. AI data centres are competing for limited supplies of memory chips, pushing up prices as demand continues to outpace supply. Consumer electronics manufacturers are increasingly likely to pass these higher input costs on to consumers, as evidenced by recent price increases announced by Apple, adding upward pressure to goods inflation.

Overall, while June's inflation report is a step in the right direction, we believe it is too early to conclude that inflation is on a sustained path back to the Federal Reserve's 2% target. The renewed rise in energy prices, combined with the delayed pass-through of higher input costs and structural AI-driven demand, suggests that upside risks to inflation remain. As such, we do not expect the Federal Reserve to cut interest rates this year and continue to see a meaningful possibility of further rate hikes should inflation prove more persistent than expected. Echoing this cautious stance, Fed Chair Kevin Warsh noted that the latest improvement in inflation represents only a single data point and does not signal mission accomplished.

Implications for investors

The combination of elevated inflation and subdued wage growth is likely to continue weighing on consumers, particularly lower- and middle-income households, for whom energy-related expenses such as electricity and gasoline account for a larger share of disposable income.

Against this backdrop, we remain cautious on US consumer discretionary equities as headwinds to household spending continue to build. With the possibility of further interest rate hikes remaining on the table, borrowing costs for mortgages, auto loans and other big-ticket purchases are likely to stay elevated, further constraining discretionary spending.

Conversely, we remain constructive on the digital economy, where companies continue to benefit from the structural tailwinds of AI adoption and sustained investment in AI infrastructure, supporting long-term earnings growth. That said, we would avoid high-growth, loss-making technology companies, which are typically more sensitive to higher interest rates through both rising financing costs and multiple compression. Instead, we favour established technology names with the balance sheet strength and pricing power to defend margins through the cycle.

This ties into our broader preference for quality companies, such as those with strong balance sheets, consistent earnings and high returns on equity as these businesses are generally better positioned to withstand a higher-for-longer interest rate environment and a more challenging macroeconomic backdrop.

Across markets, we remain underweight US equities. While US corporate earnings continue to exhibit robust growth, we believe Asian equities offer comparable earnings growth at significantly more attractive valuations, providing a more favourable risk-reward profile.

Table 1: Recommended products

Sector/Style	Recommended Products
Digital Economy	•      Fidelity Global Technology A-ACC-USD •      Eastspring Investments Unit Trusts – Global Technology SGD •      Invesco NASDAQ Internet ETF (NASDAQ: PNQI)
Quality	•      JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.