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MANHATTAN (CN) — Investors were given a rare treat in positive inflation news, but renewed conflict with Iran and increasing oil prices dampened the enthusiasm.
After peace talks fell through again, the United States and Iran traded blows and imposed another blockade on the Strait of Hormuz. As a result, Brent crude oil prices fluctuated this week but ended around $87 per barrel at the end of the week.
The conflict also took its toll on equities, already contending with another plunge in computer chip stocks, causing the Dow Jones Industrial Average to drop 491 points, the S&P 500 to lose 118 points, and the Nasdaq to decline 761 points by Friday’s closing bell.
A pair of inflation reports from the Bureau of Labor Statistics both showed disinflation in June, a welcome respite for investors who have been dogged by energy prices and tariffs this year.
The consumer price index found that inflation dropped by 0.4% after a 0.5% increase in May. The producer price index, which tracks wholesaler prices, showed a 0.3% decrease last month. Both reports have core inflation lower than nearly any juncture since 2021.
The declines were largely expected, as the bump in inflation the previous two months was blamed on the Iran conflict, which had appeared resolved last month. Energy prices in the CPI fell from 9.7% to 5.7%, while energy prices in the PPI dropped by 6.4% last month.
The two reports also support the growing consensus that tariff-related inflation has burned off the U.S. economy, with a number of sectors apparently discounting their prices last month.
However, experts say while the headline numbers are excellent, there remain hints that inflation will not drop to levels favored by the Federal Reserve and that if supply-chain snags are not resolved by Labor Day, inflation may not improve by much more.
“We may still be at an inflection point, given the risk that the energy shock could spill over into other categories of consumer prices,” Jeffrey Roach, chief economist at LPL Financial, said in a statement. “A positive resolution with Iran before the end of the summer is becoming increasingly important.”
Retails sales for June also hit the mark with a 0.2% increase as expected, though that is far less than the 1% gain seen in May. Again, energy prices were the main reason for the drop, as sales excluding those at gas stations were up 0.7% month-over-month.
The rise in spending and drop in inflation coincides with greater optimism among both consumers and businesses.
The monthly survey from the National Federation of Independent Business increased more than two points to close in on its 52-year average of 98 points, while the trade group’s “expectations” index also increased substantially and its “uncertainty” index fell by two points.
“Lower fuel costs provide welcome relief for businesses, as well as consumers, with firms anticipating improved operating conditions over the next six months,” NFIB Chief Economist Bill Dunkelberg said in a statement.
An index from the U.S. Chamber of Commerce also shows small businesses largely are confident in the economy, though inflation concerns remain. Locally, however, small businesses seem more pessimistic, with only one-third of respondents rating their local economy as good during the third quarter.
“The message this quarter is one of measured confidence,” said Tom Sullivan, senior vice president of small business policy at the chamber. “Small businesses are still looking ahead, even as they navigate a tougher cost environment.”
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