Why Economists Expect Biggest CPI Drop in Years While Core Inflation Remains Sticky

Key Takeaways

• The June CPI report is forecast to show the biggest overall decline in over six years, thanks to falling gas prices.
• Economists say the rise in gas prices earlier this year appears to have been contained, and they will be watching the impact of falling energy costs.
• The Fed is still seen raising interest rates later in 2026.

Economists forecast that falling gas prices will turn the June Consumer Price Index negative, but that doesn’t mean the coast is clear for inflation just yet. Stripping out volatile food and energy prices should show inflation remains well above the Federal Reserve’s target on an annual basis, according to economists.

Still, economists say the good news is that inflation pressures have at least stabilized, and the surge of oil prices earlier in 2026 does not appear to have spread beyond the most energy-sensitive portions of the economy. The question is how other variables in the inflation picture may improve.

The CPI is forecast to decrease 0.2% in June from the previous month, which would mark its largest monthly decline since April 2020. However, on an annual basis, the CPI will still be up 3.9%, according to FactSet. Core CPI, which excludes volatile food and energy prices, is forecast to rise 0.25% from May and 2.80% year over year.

The June CPI should “confirm the good news on headline inflation: the energy surge that pushed headline CPI momentum to about 6% through May is now reversing,” wrote JP Morgan chief economist Bruce Kasman last week. However, “the message on the core is more mixed.”

With the Fed now seen as more focused on sticky inflation rather than the jobs market, thanks to recent strength in hiring, analysts say the CPI data is more critical to policy. The bond market is priced for one, if not two, interest rate increases by the end of the year. With oil prices rising again on renewed fighting over the Strait of Hormuz, some analysts see those odds rising.

But some economists hope the June report will provide good news on the inflation outlook. “As soon as we move past the geopolitical pressures that have been impacting inflation and growth, we should see, in the next couple of reports, perhaps a little bit of improvement in some categories,” says LPL chief economist Jeff Roach.

June CPI Report Forecasts

• CPI report release date and time: Tuesday, July 14, at 8:30 am ET
• The CPI is forecast to decrease 0.17% in June after rising 0.50% in May, according to FactSet.
• Core CPI is forecast to rise 0.25% for the month versus 0.20% in May.
• The CPI is forecast to rise 3.9% year over year in June after rising 4.2% in May.
• Core CPI is forecast to rise 2.8% year over year in June versus 2.9% in May.

Gas Prices to Drive Overall June CPI Down

Economists say the big driver of the June CPI is expected to be the drop in gas prices that followed the plunge in oil prices after the agreement to end the Iran war. At UBS, economists expect gas and energy prices to drop by more than 9%. “Daily gasoline prices have fallen 76 cents per gallon (17%) since their peak on May 20, according to AAA,” they wrote. That would subtract some 0.42 percentage points from the CPI.

Overall, “the breadth of inflationary pressures has come down closer to historical norms,” writes Natixis chief economist Christopher Hodge. “The energy shock from the Iran war was not broadly passed through to core goods prices, and while there may still yet be some pipeline pressures, we think that they will be both muted and fleeting.”

Hodge expects overall inflation to drop by 0.07% in June and the annual rate to fall to 3.90%. He expects core CPI to rise 0.24% month over month and 2.80% year over year.

Deutsche Bank economists are watching for the pass-through of lower energy prices: “We expect price stickiness on the way down to yield relatively muted declines in both airline fares and delivery, but there could be downside risks to these categories to the extent that lower oil prices are passed along to consumers faster.”

JPM’s Kasman says that while the energy pass-through to core inflation has been limited so far, services inflation remains elevated, and core inflation looks sticky at around 3%. Even if core peaks earlier than feared, the survey’s signals—PMI prices, delivery times, supply chain measures, and shipping costs—still point to building pipeline pressure in core goods.

One new item to watch, according to economists: computer prices. Late in June, Apple was forced to raise the cost of MacBooks and iPads. While that was too late in the month for the June CPI to pick up, it reflects the upward pressure on hardware across the industry resulting from the AI infrastructure boom.

Lingering Tariff Impacts

The effects of President Donald Trump’s tariffs continue to be felt in consumer prices. LPL’s Roach says that high import costs, along with energy costs, are “confusing market expectations” and are particularly leading to increases in labor and service costs in healthcare. “We’re seeing some of those goods prices come into play when you think about doctor visits, dentists, and eyeglasses. Those professional services are starting to tick upward because of some of the higher costs of just importing those products.”

UBS economists predict a similar tariff effect. “We expect there is still tariff pass-through to go, but with IEEPA tariff rebates in process and the 301 tariffs not implemented until July, the degree of tariff pass-through probably will be fairly minimal in this month’s and next month’s CPI,” they wrote.

As a result, the core goods picture remains mixed. JPM’s Kasman says core inflation remains sticky at 3% and services inflation remains elevated, even despite oil prices being contained. “Even if core peaks earlier than feared, the survey signals—PMI prices, delivery times, supply chain measures and shipping costs—still point to building pipeline pressure in core goods,” he writes. He expects inflation overall to drop 0.20% from May, and for core CPI to gain 0.22%, which is “well above the Fed’s target.”

Federal Reserve Appears “Hawkish” on Interest Rates for Now

With core inflation remaining high and the economy looking solid, investors expect the Fed to implement one or two interest rate hikes by the end of the year, according to the CME FedWatch Tool. The federal-funds rate target range is currently 3.50%-3.75%. Bond futures traders put the chances of a July interest rate increase at 39%, up from less than 10% a month ago. By year-end, the market sees a 35% chance of the rate being raised by a quarter point, while another 35% predict it will go up by a half point.

Deutsche Bank economists say “mixed” economic developments since the last Fed meeting (such as easing inflation pressures and signs of a resilient labor market) could prompt some policymakers to take a more hawkish stance. At Bank of America, economists call for three rate increases this year.

But LPL’s Roach doesn’t believe the Fed will raise rates anytime soon. “I think there’s going to be this conversation about remaining hawkish in their tilt,” he says. “I don’t think they’re going to raise rates in July, and if inflation improves in the next couple of months, there’s a chance they’ll stand pat in the next few meetings as well.”

The Fed is weighing several economic indicators, setting up a wait-and-see approach for the remainder of the year. “Recent Fed communication makes clear that inflation is the body’s primary concern,” Natixis’ Hodge writes. “We are cautiously optimistic that June’s and subsequent prints will show that domestically generated inflationary pressure has abated, helping to obviate the need for a hike.”