Inflation has biggest drop since 2020

Inflation fell in June, on the back of lower energy prices, the government said Tuesday.

Why it matters: It's the largest one-month decrease since April 2020, but it may be a short-lived reprieve — the report doesn't account for the sharp increase in oil prices this month as the Iran war re-ignites.

By the numbers: Still, inflation is pretty hot. The Consumer Price Index rose 3.5% in the 12 months through June — down from 4.2% in May.

• On a monthly basis, prices fell 0.4%, after increasing 0.5% in May.

Zoom in: The CPI for energy fell 5.7% in June, after climbing 3.9% in May — it was the largest factor in the June fall in inflation.

• Core CPI, which excludes more volatile food and energy prices, rose 2.6% in June, after increasing 2.9% in May.

The big picture: The data doesn't account for the sharp rise in oil prices this week, as the U.S. and Iran resumed a hot war.

• The price of a barrel of Brent crude is up more than 20% since July 1 — and was at $86.53 Tuesday morning.

Between the lines: That means Americans are likely about to experience another bout of pain at the gas pump — a political problem for President Trump and Republicans as the midterm elections draw near.

• It's not just Iran either. A second supply shock is building in Russia, which is facing a fuel shortage due to its war against Ukraine. It's a "double whammy with little cushion," wrote Patrick De Haan, head of petroleum analysis at GasBuddy.

What to watch: Even as the inflation picture looks a little less severe than last month, it's not at all clear that we're on track to come close to the Federal Reserve's 2% target anytime soon.

• Tariff price increases are still being passed through to consumers — and the AI boom is raising costs.

Yes, but: The decline in inflation in June could keep the Federal Reserve from raising rates further this year, analysts say.

What to watch: Expect all of this to come up later this morning when the new Federal Reserve chairman, Kevin Warsh, testifies before the House Financial Services Committee, and again tomorrow, when he appears before the Senate Banking Committee.