WASHINGTON (AP) — U.S. inflation fell for a third straight month in June, signaling that the worst price surge in four decades is steadily tapering off and that interest rate cuts by the Federal Reserve may be coming soon.
The Labor Department's consumer price index released Thursday beat expectations, showing it was flat last month but fell 0.1% from May to June, the first monthly decline in inflation since May 2020, when the pandemic crippled the economy.
Also, compared to a year ago, prices were up 3% in June, slower than the 3.3% annualized rate in May.
The latest inflation reading will help convince Fed policymakers that inflation is on its way back to its 2 percent target. A brief rise in inflation earlier this year led Fed officials to scale back their outlook for rate cuts. Policymakers said they needed several months of modest price increases before they were confident enough to cut their key interest rate, which is at a 23-year high.
The June figure will be the latest in a push for better inflation data from the central bank, which has been pushing for more than 100,000 jobs since 2013. If inflation remains low through the summer, most economists expect the Fed to start cutting interest rates in September.
But even as inflation slows, the costs of food, rent, health care and other necessities remain much higher than they were before the pandemic, posing a source of public frustration and a potential threat to President Joe Biden's reelection.
Gas prices fell sharply for the second straight month in June, dropping 3.8% nationwide from May. Gas prices are now down 2.5% year-over-year.
Food prices rose just 0.1% last month, the first increase in five months, and were up just 1.1% year-on-year.
Core prices, which exclude volatile food and energy prices, rose just 0.1 percent from May to June, down from a 0.2 percent increase in the previous month. Looking 12 months ahead, core prices rose 3.3 percent in June, down from a 3.4 percent increase in May. Core prices are thought to provide a particularly clear signal of where inflation is likely to head.
Prices for new and used cars also fell last month. Used car prices, which have soared during the pandemic, have fallen 10.1% over the past year.
Rent and homeownership costs, which account for more than a third of the Consumer Price Index, rose at a modest pace last month, rising 0.3% from May to June. That was the slowest increase in nearly three years and may signal that a long-awaited slowdown in rent growth is finally here. Still, rents rose 5.1% in June from a year ago, a much faster rate than before the pandemic.
The Federal Reserve has kept interest rates steady for nearly a year after raising them aggressively in 2022 and 2023, leading to higher costs for mortgages, auto loans, credit cards and other borrowing for consumers and businesses.
Inflation is currently well below its mid-2022 peak of 9.1%. Other indicators suggest the economy is slowing but healthy: The unemployment rate remains relatively low, employment is stable and many consumers continue to spend money on travel, dining out and entertainment.
Core inflation has fallen steadily in the second half of 2023, raising expectations that the Fed will cut rates as many as six times this year. But inflation remained elevated in the first three months of the year as the costs of auto insurance, apartment rents and other services soared, leading Fed officials to lower their forecast for rate cuts in 2024 to one from three. Wall Street traders expect two rate cuts this year, with the first coming in September.
Federal Reserve Chairman Jerome Powell said in congressional testimony on Tuesday that the job market has “cooled considerably” but “is not contributing to broad-based inflationary pressures,” marking a sharp shift from past comments in which he suggested rapid wage growth could perpetuate inflation because some companies would likely raise prices to offset rising labor costs.
Instead, the June jobs report released last week showed the unemployment rate rose for a third straight month to a still-low 4.1%, even as hiring remains strong. More Americans are starting to look for work, but some are struggling to find work. Most of the economy's hiring in recent months has come from just three sectors: government, health care, and a category that includes restaurants, hotels and entertainment companies.