June’s Consumer Price Index fell 0.4% for the month, pulling the annual inflation rate down to 3.5% from 4.2% in May. Core inflation, excluding food and energy, remained flat for the month and slowed to 2.6% year over year. Predictably, markets immediately began betting that the Federal Reserve will soon ride to the rescue with lower interest rates. They continue trying to force the economy into a textbook model that has never explained how the world actually functions.
The biggest driver behind the decline was energy. According to the Bureau of Labor Statistics, gasoline prices plunged 9.7% during June while the overall energy index dropped 5.7%, the sharpest monthly decline since the COVID lockdowns. Shelter costs rose just 0.1%, the slowest pace in years, while motor vehicle insurance, apparel, communications, and several medical categories also eased. On paper, it all looks encouraging. Unfortunately, economies do not move on paper. They move because of confidence, politics, and capital flows, which is precisely what Keynesian economists have never understood.
Everyone is pretending this is some great achievement by the Federal Reserve when the reality is that oil simply backed off after the temporary ceasefire between Israel and Iran allowed shipping through the Strait of Hormuz to normalize. Oil retreated, gasoline followed, and CPI reflected that decline. Yet the geopolitical situation has hardly been resolved. The Middle East remains on the edge, shipping risks have not disappeared, and energy markets can reverse far faster than politicians can hold another press conference claiming victory. Anyone who believes one month of cheaper gasoline means inflation has been defeated has learned nothing from the last several years.
Food prices certainly did not get the memo. Americans continue paying more at the grocery store, restaurant prices remain elevated, and household budgets are still being squeezed from every direction. Shelter inflation may have slowed, but housing remains one of the largest burdens facing ordinary families. Insurance premiums continue climbing, property taxes are rising almost everywhere, financing costs remain substantially above where they were just a few years ago, and governments continue finding new ways to extract revenue from their citizens. This is why people no longer trust official statistics. They know perfectly well what it costs to feed a family, insure a home, or buy a vehicle.
The Federal Reserve now finds itself trapped in the same position I have been warning about for years. Inflation remains well above its mythical 2% target, yet economic growth continues to slow. The markets still cannot decide whether the Fed will raise rates again or begin cutting them because everyone continues looking only at inflation while ignoring the far bigger problem sitting underneath the entire system. Sovereign debt has reached levels where governments themselves have become the greatest source of financial instability.
This is where our computer has always differed from conventional economics. Interest rates are not driven simply by inflation. They are driven by confidence. Capital moves toward political stability and away from governments that investors no longer trust. During periods of geopolitical uncertainty, both the USD and gold can rise together because money is fleeing risk, not because someone solved an equation in an economics department.
The computer has never been focused on a single CPI report because one month’s inflation data does not change the trend. We are moving through a Panic Cycle where sovereign debt, geopolitical conflict, and the collapse in public confidence are converging at precisely the same time. Temporary declines in gasoline prices do not alter that trajectory any more than temporary rallies in the stock market end a bear phase. The people celebrating today’s inflation report are looking in the rearview mirror while the next crisis is already forming on the horizon.