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 runaway inflation 16 months ago.

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

That general metric captures large declines gas prices and some other products that could turn out to be ephemeral, so politicians are looking closely at another measure: the change in prices after removing 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 less than they otherwise might have.

The core index climbed 4.8 percent compared to the previous year, down from 5.3 percent in the year to May. Economists had predicted 5 percent growth. 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 definitely good news because it allows consumer wages to stretch further and less pain at the gas pump and in the grocery aisle. But Federal Reserve officials are still trying to gauge whether the cooling is likely to be quick and complete. They don’t want to allow price increases to remain at slightly high levels for too long, because if they do, consumers and businesses might adjust their behavior in ways that make faster inflation a permanent feature of the economy.

With that in mind, they can 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 set the stage for a “more extended pause” later. She added that cooling car prices and slower rent increases should keep inflation subdued, and she predicted the Fed would not raise interest rates this year after the July change.

June’s slowdown in inflation came as some key products and services posted steep price increases. Airfare fell 8.1 percent compared to the previous month, and used cars and trucks were down 0.5 percent. New vehicle prices were flat compared to May.

Not all of those changes will necessarily last: Airfare, for example, is not expected to continue to decline as sharply as it did in this report. But for the Fed, there were other encouraging signs that the cooling is broad enough to prove sustainable.

First, the cost of housing as measured by the Consumer Price Index – which depends on rental prices – is falling sharply. This is expected to continue in coming months. An index tracking rents for primary residences slowed to a 0.46 percent change in June, the weakest growth from March 2022.

Car prices are also cooling. After years in which semiconductor shortages and other parts problems limited supply, making it difficult to meet growing demand, discounting is back on auto dealers. Inventories are rebounding, and consumers have a less voracious appetite for new cars in particular.

“It’s different from the past two years, and even different from the fall,” said Beth Weaver, who runs a Buick GMC dealership in Erie, Pa. “Interest rates have definitely weighed on demand.”

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

But despite all of the recent progress, inflation remains above the rate of increase normal before the 2020 pandemic. And the economy still maintains momentum, with strong job and wage growth, which could give companies the wherewithal to keep raising prices. That’s why Fed officials are hesitant to say they’ve won the fight against inflation.

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

The Fed officially targets 2 percent inflation on average over time, although it defines that target using a separate inflation measure, the Personal Consumption Expenditure index. That gauge is also slowing notably, and its June reading is scheduled for release July 28th.

Even though central bankers are likely to interpret the slowdown cautiously — aware that price increases have slowed and then accelerated again before — many commentators welcomed the fresh data point as the latest sign that the economy may be slowing gently.

Officials at the Fed have tried to engineer a “soft landing” in which inflation slows gradually and without requiring a big jump in the unemployment rate. Interest rate increases work in part by slowing the labor market and cooling wage increases, so the Fed’s fight against inflation and the strength of the labor market are closely linked.

“The continued decline in inflation is encouraging news for the US labor market outlook,” wrote Julia Pollak, chief economist at ZipRecruiter, in response to the recent release. “It increases the likelihood that the Fed will be able to pause rate hikes after one final July hike, and gradually cut rates through 2024.”

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