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Economy

US Inflation Cools Again, Potentially Paving Way for Fed to Cut Interest Rates Soon

WASHINGTON (AP) — Inflation in the United States cooled in June for a third straight month, a sign that the worst price spike in four decades is steadily fading and may soon usher in interest rate cuts by the Federal Reserve.

In a better-than-expected report from the government, consumer prices declined 0.1% from May to June after having remained flat the previous month, the government reported Thursday. And measured from 12 months earlier, prices were up 3% in June, down from 3.3% in May.

The latest inflation readings could help convince the Fed’s policymakers that inflation is returning to its 2% target. A brief pickup in inflation early this year had caused Fed officials to scale back their expectations for interest rate cuts. They responded by saying they would need to see several months of mild price increases to feel confident enough enough to cut their key rate from its 23-year high.

The June inflation data will qualify as as another installment of the more good data the Fed’s policymakers have been seeking. Should inflation remain low through the summer, many economists expect the Fed to begin cutting its benchmark rate in September.

Even as inflation slows, though, the costs of food, rent, health care and other necessities remain much higher than they were before the pandemic — a source of public discontent and a potential threat to President Joe Biden’s re-election bid.

Excluding volatile food and energy costs, so-called core prices climbed just 0.1% from May to June, below the 0.2% increase in the previous month. Measured from a year ago, core prices rose 3.3% in June, down from 3.4% May. Core prices are thought to provide a particularly telling signal of where inflation is likely headed.

The Fed has kept its key rate unchanged for nearly a year after having aggressively raised it in 2022 and 2023, leading to costlier mortgages, auto loans, credit cards and other forms of consumer and business borrowing.

Inflation is now far below its peak of 9.1% in mid-2022. Other measures suggest that the economy is healthy, though slowing: Unemployment is still relatively low, hiring remains steady and many consumers continue to travel, eat out and spend on entertainment.

In the second half of 2023, core inflation cooled steadily, raising expectations that the Fed would cut its key rate up to six times this year. But then fast-rising costs for auto insurance, apartment rents and other services kept inflation elevated in the first three months of this year, leading Fed officials to downgrade their forecasts for rate cuts in 2024 from three to just one. Wall Street traders expect two rate cuts this year and have put the likelihood of a first cut in September at roughly 75%, according to futures prices tracked by CME FedWatch.

The national average gas price dropped about 18 cents a gallon, to $3.42 in mid-June, according to the Energy Information Administration. (It has since climbed about 6 cents.)

In testimony Tuesday to Congress, Fed Chair Jerome Powell noted that the job market has “cooled considerably” and is “not a source of broad inflationary pressures.” That marked a notable shift from his past comments, which had suggested that rapid wage growth could perpetuate inflation because some companies would likely raise their prices to offset their higher labor costs.

Instead, last week’s June jobs report showed that even as hiring remained healthy, the unemployment rate rose for a third straight month to a still-low 4.1%. More Americans have started looking for work, but some have encountered trouble finding jobs. 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.


By CHRISTOPHER RUGABER AP Economics Writer

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