U.S. consumer price inflation slowed more than expected in June, but it will likely not bring relief to households or rule out a Federal Reserve interest rate hike this year, as the Middle East conflict continues unresolved.

Data released by the Bureau of Labor Statistics on Tuesday showed the Consumer Price Index rose 3.5% in the 12 months through June, still a high rate, after jumping 4.2% in May, marking the largest annual increase since April 2023.

The index fell 0.4% on a monthly basis after rising 0.5% in May.

Read also: Traders price in 50% chance of U.S. rate hike this month

Economists polled by Reuters had expected the index to rise 3.8% year-on-year and fall 0.1% month-on-month.

The decline in the index primarily reflects a drop in gasoline prices from multi-year highs as a fragile ceasefire between the United States and Iran took effect last month.

But that truce collapsed last week after commercial tankers came under fire in the Strait of Hormuz, leading to an exchange of military strikes between the U.S. and Iran.

U.S. Federal Reserve holds rates steady for fourth time in June

U.S. Federal Reserve holds rates steady in June

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Further increases are likely as oil prices rise after the United States reimposed a naval blockade on Iran.

The core inflation index, which excludes volatile food and energy components, rose 2.6% year-on-year in June after climbing 2.9% in May.

The index was unchanged during the month after rising 0.2% in May.

The U.S. central bank tracks the personal consumption expenditures price indexes to meet its target of achieving a 2% inflation rate.

The rate was below that level in early 2021. Minutes of the Federal Reserve's June 16-17 meeting, released last week, showed growing concerns among policymakers about inflation over the past month.

Where is U.S. interest rate policy heading?

The Fed kept interest rates unchanged at 3.50%-3.75% during its June meeting, but new forecasts revealed increasing speculation about a possible rate hike in 2026.

Traders see an even chance of a U.S. rate hike later this month, as renewed oil price increases and hawkish comments from Fed officials point to swift action to curb inflation.

Money market pricing on Monday indicated that traders had increased their bets on a quarter-point rate hike in July, following a series of new U.S. strikes on Iran.

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Pricing reflected a 50% probability of a rate hike, up from 40% earlier in the session, after Fed Governor Christopher Waller said policymakers may need to raise rates if core inflation continues to indicate broad price pressures.

The CME Group's FedWatch service indicated that financial markets were expecting, before the inflation data release, a probability of about 51.9% that the Fed would raise borrowing costs at its September 15-16 meeting.