US inflation cooled more than expected as both CPI and PPI came in below market estimates, easing pressure on the Federal Reserve. The softer data initially lifted gold and silver prices while weakening the US Dollar Index, although gains faded amid rising geopolitical tensions and cautious comments from Fed Chair Kevin Warsh. Markets now expect the Fed to keep rates unchanged in July, with future policy decisions likely to depend on upcoming inflation and economic data.
The much-awaited U.S. inflation data was released this week. Inflation came in considerably softer than expected, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) surprising to the downside. Both CPI and PPI headline and core surprised markets. The sharp decline in energy prices was the primary reason behind the softer inflation readings.
US Consumer Price Inflation: Headline CPI fell 0.4% month-on-month, compared with market expectations of a 0.1% decline, marking the sharpest monthly fall since April 2020. Meanwhile, core CPI (excluding food and energy) was unchanged on the month, versus expectations of a 0.2% increase. On an annual basis, headline inflation slowed to 3.5% year-on-year from 4.2%, while core inflation eased to 2.6% from 2.9%.
Energy Basket fell sharply by -9.5% thanks to a near 30% fall in WTI Crude Oil prices. But apart from Energy, education & communication, used cars, apparel, etc also slowed.
US Producer Price Inflation: Headline PPI declined 0.3% month-on-month, the sharpest monthly fall since May 2025. Core PPI (excluding food and energy) rose 0.2% month-on-month, slightly higher than the previous month's 0.1% increase. On an annual basis, headline PPI slowed to 5.5% year-on-year from 6.0%, while core PPI edged up to 4.7% from 4.6%.
Kevin Warsh's Testimony: Fed Chair Kevin Warsh reaffirmed the central bank's commitment to restoring price stability, stressing that policymakers have "no tolerance" for persistently high inflation. While welcoming the softer-than-expected CPI and PPI readings, he cautioned that a single month of benign data is not enough and that the Fed would need to see a sustained series of softer inflation prints before considering any policy shift. Warsh noted that the U.S. economy remains resilient, supported by strong AI and data centre investment, moderate consumer spending, and a healthy labour market. He also reiterated that recent inflation data may not fully capture underlying price pressures and said the Fed stands ready to adjust interest rates and other policy tools if inflation risks re-emerge.
Learn: Economic Indicators Explained : GDP Growth, Inflation, Unemployment, and Interest Rates
Impact of all this on Commodities and Dollar Index:
The softer-than-expected U.S. inflation data provided major relief for gold and silver prices. Immediately after the data release at 6:00 PM IST, gold prices rallied nearly 1%, while silver surged around 2%. The U.S. Dollar Index also weakened, falling below the 101 level and finding support near 100.68. Although the Dollar Index has been trading in a narrow range over the past one to two weeks, the softer inflation print triggered a sharp decline.
But that boost to precious metals proved to be temporary. Escalating geopolitical tensions in the Persian Gulf, with President Donald Trump vowing to intensify bombardments until Tehran halted attacks on ships transiting the Strait of Hormuz, coupled with Kevin Warsh's testimony, didn't help much for gold prices. It has resumed its downward journey and could stay that way until some clarity is achieved with respect to the geopolitical situation and inflation.
With respect to the FOMC, markets are now pricing in no interest rate hike at the July meeting. For the September meeting, CME FedWatch probabilities indicate a 49% chance that the Fed will leave rates unchanged and a 45% probability of a 25-basis-point rate hike. Markets currently expect the first rate hike to come in October, with a 46% probability. By the end of 2026, investors are pricing in only one 25-basis-point rate hike, compared with expectations of two rate hikes a month ago.
