June Inflation Report: Inflation Continues to Cool

Inflation data released on Wednesday showed a pronounced cooling and offered some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago.

The Consumer Price Index climbed 3 percent in the year through June, less than the 4 percent increase in the year through May and just a third of its roughly 9 percent peak last summer.

That overall metric catches big declines in gas prices and a few other products that could prove ephemeral, which is why policymakers closely watch a different measure: the change in prices after stripping out food and fuel costs. That measure, known as the core index, offered news that was even better than what economists had expected, sending stocks higher as investors bet that the news would allow the Fed to raise interest rates by less than they otherwise might have.

The core index climbed 4.8 percent compared with the previous year, down from 5.3 percent in the year through May. Economists had forecast a 5 percent increase. And on a monthly basis, the core index climbed at the slowest pace since August 2021.

“This is very promising news,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. “The pieces of the puzzle are starting to come together. But it’s just one report, and the Fed has been burned by inflation before.”

Slower inflation is unquestionably good news, because it allows consumer paychecks to stretch further and inflicts less pain at the gas pump and in the grocery aisle. But Federal Reserve officials are still trying to assess whether the cool down is likely to be quick and complete. They do not want to allow price increases to linger at slightly elevated levels for too long, because if they do, consumers and businesses could adjust their behavior in ways that makes more rapid inflation a permanent feature of the economy.

Given that, they may be cautious in interpreting the news. Officials have signaled in recent weeks that they are likely to raise interest rates at their July 25-26 meeting.

Ms. Rosner-Warburton said she thought a July move was still likely, but that the fresh inflation data could lay the groundwork for “a more extended pause” after. She added that a cooling in car prices and slower rent increases should keep the moderation in inflation underway, and she forecast that the Fed would not raise interest rates again this year following the July change.

The June inflation slowdown came as a few key products and services posted steep price declines. Airfares fell 8.1 percent compared with the previous month, and used cars and trucks were down 0.5 percent. New vehicle prices were flat compared with May.

The cost of housing as measured by the Consumer Price Index — which relies on rent prices — is coming down sharply. That is expected to continue in coming months.

More broadly, price increases for a basket of services excluding energy, food and housing costs — a metric that the Fed watches very closely — continued to slow in June.

But in spite of all of the recent progress, inflation remains above the rate of increase that was normal before the 2020 pandemic. And the economy still retains momentum, with strong job and wage growth, which could give companies the wherewithal to keep raising prices. That is why Fed officials are hesitant to say they have won the battle against inflation.

“It would be a mistake” to “declare victory” too early, Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said on a call with reporters this week.

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