The US producer price index fell 0.3% in June from May, the first monthly decline since August 2025 and the sharpest since April of that year, the Labor Department reported on Wednesday. The drop, which confounded analysts who had forecast no change, followed a softer-than-expected consumer inflation reading a day earlier and prompted an immediate repricing of interest-rate expectations. Markets now assign only an 11% probability to a Federal Reserve rate increase at this month’s meeting, down from 42% before the data, with the first move not fully priced until the final quarter of 2026.

The disinflation was overwhelmingly an energy story. Goods prices slid 1.4%, the largest fall since mid-2022, as energy costs tumbled 6.4% and gasoline dropped 12%. The pullback reflected a temporary ceasefire between Washington and Tehran that eased supply fears and allowed oil prices to retreat. That truce has since collapsed. The US has reimposed a naval blockade on Iranian ports, Iran is keeping the Strait of Hormuz closed to much traffic, and crude prices have surged anew. Analysts in London and New York warn that the June reprieve is therefore fragile and that renewed hostilities risk feeding back into headline inflation within weeks.

Federal Reserve Chair Kevin Warsh, testifying before Congress, acknowledged the encouraging data but struck a resolutely cautious tone. He described inflation as an “unfair burden” and a “tax” on Americans, insisting the central bank would follow the data even if criticised by the White House. Warsh stressed that the Fed’s 2% target remains distant and that it is too soon to declare victory. His remarks, viewed from Washington, signal that the central bank is in no hurry to ease policy and will want to see several months of sustained cooling before altering its stance.

Equity markets rallied on the twin inflation surprises, with the S&P 500 and Nasdaq advancing, led by technology and semiconductor shares. The upbeat mood was reinforced by strong quarterly earnings from major banks. Yet the rally rests on an assumption that the energy-driven disinflation can persist. With the Strait of Hormuz again a flashpoint, that assumption looks increasingly tenuous.

The next factual test arrives with the personal consumption expenditures price index, the Fed’s preferred gauge, due at the end of the month. The central bank’s next policy decision is scheduled for 29 July.