Inflation cooled further in June, welcome news for the fed and consumers

The consumer price index climbed at a moderate pace in June compared with a year earlier and fell on a monthly basis, welcome news for Federal Reserve officials who are watching for further evidence that they have wrestled rapid inflation under control.

Overall inflation was 3% in June on a yearly basis, down from 3.3% in May, and softer than the 3.1% that economists had forecast in a Bloomberg survey.

After stripping out food and fuel prices for a sense of the underlying trend, the “core” price index climbed 3.3% compared with a year earlier, down from the previous report. And compared with the previous month, prices dropped 0.1%, while the core index ticked up only slightly.

In all, the very cool inflation data provided clear evidence that inflation is slowing meaningfully, exactly the kind of progress that Fed officials have been hoping to see as they contemplate when to begin cutting interest rates. The central bank has held borrowing costs at 5.3% for the past year, a relatively high setting that is meant to cool the economy by weighing down demand for big purchases that require loans, like houses and cars.

While policymakers came into 2024 expecting to cut them several times, a spate of stubborn inflation numbers early in the year have kept them on hold. But now, evidence is mounting that inflation is truly coming under control, which could pave the way for a rate cut in the coming months.

“This is the inflation report that we’ve been waiting for,” said Neil Dutta, head of economic research at Renaissance Macro. “The important story for the Fed is that this is happening at a time when the unemployment rate has been going up for the last three months, and the trade-offs are shifting.”

Dutta said he thought the Fed could even consider cutting interest rates at its meeting this month, which takes place July 30-31. Investors more widely think that the central bank will lower borrowing costs at the meeting after that, on Sept. 17-18. Expectations for a reduction at that meeting ticked up following the report.

That broad-based inflation slowdown is likely to provide relief to consumers, who have been glum about the economy as they face heftier price tags in grocery aisles and as they go about their daily lives. That could in turn benefit the Biden administration, which has struggled to take credit for strong growth and a solid labor market at a time when voters are fixated on high prices.

Thursday’s inflation reading was markedly cooler than inflation’s 2022 peak of 9.1%. Now that inflation has come down so much, Fed officials are focused on not overdoing their effort to cool the economy: They want to fully stamp out inflation, but they do not want to cause a recession in the process.

“If we loosen policy too late or too little, we could hurt economic activity,” Fed Chair Jerome Powell said during congressional testimony this week.

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