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 percent in June on a yearly basis, down from 3.3 percent in May, and softer than the 3.1 percent 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 percent compared to year earlier, down from the previous report. And compared to the previous month, prices dropped 0.1 percent, 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 percent 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.”
Mr. Dutta said he thought that 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.
Thursday’s inflation reading was markedly cooler than inflation’s 2022 peak of 9.1 percent. 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,” Jerome H. Powell, the Fed chair, said during congressional testimony this week. “If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks, and that’s really the essence of what we’re thinking about these days.”
While Mr. Powell avoided identifying a specific month when the Fed might begin to cut interest rates during his two days of testimony this week, he did little to push back on growing expectations that a reduction could come in September.
Fed policymakers officially target 2 percent annual inflation, and they define that goal using the Personal Consumption Expenditures inflation measure, which is related to Thursday’s Consumer Price Index but released later in the month. The June version of that figure is set for release on July 26, just a few days before the central bank’s next meeting.
While the annual inflation numbers remain above the levels that were normal before the pandemic — and could remain sticky in the coming months, per economist forecasts — that is partly for mechanical reasons. Inflation began to slow sharply around this time last year, which means that the data going forward is being compared to those more subdued year-ago readings. The so-called base effect makes it harder for the annual figures to decelerate as quickly.
Given that, Fed officials are likely to pay especially close attention to what is happening with inflation on a month-to-month basis as they try to understand how trends are shaping up. They are also watching key underlying details, which were overwhelmingly positive in Thursday’s report.
Officials have spent months waiting for evidence that shelter costs are cooling, because they make up a big chunk of overall inflation and tend to move slowly. That finally happened in the June data.
Adding to the good news, travel-related services like airline fares and hotel rooms outright fell in price, and a range of other service costs climbed more slowly. Goods prices have already been flat or falling on a monthly basis for some time, and that trend continued in June.
That broad-based slowdown is likely to provide welcome 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.
Mr. Biden said that the report “shows that we are making significant progress fighting inflation,” in a statement following the release.
“It’s a report that shows households are getting some much-welcome breathing room in key areas of their budgets,” Jared Bernstein, chair of the White House Council of Economic Advisers, said in an interview. “Our work here isn’t done, but we’re moving solidly in the right direction.”
And at the Fed, attention is likely to turn more and more to the job market as inflation ceases to be such a pressing problem. The unemployment rate has ticked up to 4.1 percent over the past year, up from 3.6 percent last June. Employers have fewer unfilled job openings, and wage growth is cooling after years of rapid gains.
Central bankers try to achieve both slow, steady inflation and a strong labor market. After several years in which inflation was their bigger concern, Mr. Powell and his colleagues have recently been clear that they are increasingly paying close attention to both of those goals.
“Elevated inflation is not the only risk we face,” Mr. Powell said this week.