Inflation eased more than expected in June as falling gasoline prices offset another increase in rent, providing a third straight month of relief for Americans struggling with a pandemic-related spike in prices.

The development, combined with a recently cooling job market, should bolster the case for the Federal Reserve to cut interest rates in the next couple of months − a move that likely would juice the economy and U.S. stocks.

Overall prices rose 3% from a year earlier, down from 3.3% in May, a third-straight monthly pullback, according to the Labor Department’s consumer price index, a broad gauge of goods and services costs. That’s the smallest rise in a year. On a monthly basis, costs edged down 0.1% after flatlining the previous month.

The price of used cars and airfares dropped, while grocery and health care costs rose modestly.

What is the core inflation rate today?

Core prices, which exclude volatile food and energy items and are watched more closely by the Fed, increased 0.1% after rising 0.2% in May for the second month. That pushed annual inflation down from 3.4% to 3.3%, the lowest since April 2021.

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Is inflation slowing yet?

After reaching a 40-year high of 9.1% in mid-2022, inflation eased substantially last year but unexpectedly surged in the first quarter.

Starting in April, though, price gains have gradually resumed their pullback. The price of goods such as used cars, furniture and appliances generally have drifted lower as pandemic-related supply chain snarls have faded.

But the costs of services such as rent, car insurance and health care have continued to advance. That’s partly because employee wage growth was propelled by COVID-19-induced labor shortages and is slowing just gradually. Many employers have passed their higher labor costs on to consumers.

Barclays expects that by December, yearly inflation will slow to 3% and the core index measure will fall to 3.2% – still well above the Fed’s 2% goal.

Are interest rates going to drop in 2024?

Federal Reserve Chair Jerome Powell has acknowledged progress on inflation but said officials are seeking more evidence price increases are approaching the Fed’s 2% target before lowering interest rates.

Thursday's encouraging report could provide that evidence.

"These data will raise confidence within the Fed that inflation is indeed on a sustainable path towards 2%," economist Rubeela Farooqi of High Frequency Economics wrote in a note to clients. Pointing to a slowing job market as well as the modest inflation numbers, Farooqi said the Fed could signal a rate cut at a meeting this month and act as soon as September.

At a Senate hearing this week, Powell said the central bank could chop rates if employment weakens unexpectedly, even if price increases don't slow as quickly as officials hope. The labor market, he added, “has cooled really significantly,” solidifying many economists’ forecasts for a September rate cut.

Although the economy created 206,000 jobs in June, the private sector added just 136,000, gains for previous months were revised sharply lower, and the unemployment rate ticked above 4% for the first time since November 2021.

From March 2022 to July 2023, the Fed raised its benchmark short-term rate from near zero to a 23-year high of 5% to 5.25% to help subdue inflation, holding the rate steady the past year.  

Fed rate cuts would lower borrowing costs for consumers and businesses but also push down bank savings account yields that have become more generous after years of paltry returns.

Why is the price of gasoline decreasing?

Gasoline prices fell 3.8% in June, the second straight decrease after three monthly bumps. Demand is easing as Americans cut back their summer travel amid persistent inflation.

Are rents falling in the US?

Rent increased 0.3% in June, the smallest rise since August 2021. That nudged down the annual increase from 5.3% to 5.1%, a more than two-year low. Economists have expected rent increases to moderate, based on new leases, and that’s finally starting to happen more rapidly.

The cost of some other services also declined. Airfares fell 5% and hotel rates 2%. The lower prices underscore “the post-COVID travel boom may be over,’ said economist Paul Ashworth of Capital Economics.

Meanwhile, bills for medical care services and car repairs each rose a modest 0.2%. But car insurance resumed a long-standing post-pandemic surge after easing in May, leaping 0.9% and 19.5% annually.

Goods prices also were generally benign. Used car prices fell 1.5%, while new cars dipped 0.2% and furniture slipped 0.9%, though appliance costs rose 0.5%. Apparel prices edged up just 0.1% following a 0.3% drop the previous month.

Are food prices going down?

Grocery prices inched up just 0.1% after flattening or dipping for several months. They’re up just 1.1% annually. The prices farmers received for items such as vegetables, dairy and poultry softened in April and May, leading to drops in retail prices last month, according to Barclays and the Agriculture Department.

Last month, prices fell for chicken by 0.2%; cereal, 1.3%; and rice, 0.4%. The cost of bacon was flat.

Egg prices, though, rose 3.5%, resuming a bird-flu-related advance after dropping the prior two months. Fish costs increased 2.1%, uncooked ground beef rose 1.1% and bread edged up 0.7%.

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