Inflation cooled significantly in June, offering some of the most hopeful news since the Federal Reserve began trying to tame inflation 16 months ago – and boosting the chances that the central bank could hold off on raising interest rates after its meeting this month.

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 total measure is pulled down by large declines in gas prices that could turn out to be ephemeral, so policymakers are looking closely at a leaner version: the change in prices after removing food and fuel costs. That metric, known as the core index, offered news that was even better than what economists had expected.

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 every month it climbed at the slowest pace since August 2021.

Slower inflation is definitely good news, as it allows consumer wages to stretch further at the gas pump and in the grocery aisle. And if inflation can cool sustainably without a big rise in unemployment or a painful economic recession, it could allow workers to hold on to the major gains they’ve made over the past three years: progress toward better jobs and wages that have helped reduce unemployment. income inequality

The White House, which has spent more than a year on the defensive against rising prices, celebrated the latest report, with President Biden calling the current economic moment “Bidenomics in action.” And stocks soared as investors bet the Fed would be able to be less aggressive in its fight against inflation — even halting its rate hikes after a final July move — in light of the new data.

“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.”

Fed officials are likely to avoid declaring victory just yet. Policymakers are still trying to gauge whether the cooling is likely to be swift 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.

That’s why officials have signaled in recent weeks that they are likely to raise interest rates at their July 25-26 meeting. Politicians have also indicated that one or more additional tariffs could be guaranteed after that.

“Inflation is too high,” Thomas Barkin, the president of the Federal Reserve Bank of Richmond, said Wednesday in a speech in Maryland, according to Bloomberg. “If you pull back too soon, inflation comes back strong, which then requires the Fed to do even more.”

But economists and investors saw less chance that the Fed would raise rates again later this year because of the fresh data.

Policymakers have already slowed the pace of tax cuts sharply, skipping an adjustment at the June meeting. Assuming they continue again in September, that could mean it will be November before they have to seriously debate raising borrowing costs again – and then, success in bringing down inflation could be clear.

“They don’t want to unleash animal spirits too quickly here and have everyone go bananas,” said Julia Pollak, chief economist at ZipRecruiter. But by November, “it may be clear in the data that their work is done.”

The details of the June report offered reasons for optimism. The slowdown in inflation came as some key products and services posted steep price hikes. 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. That progress came even at a time when unemployment is hovering near its lowest level in half a century and employment remains stronger than before the pandemic.

Fed interest rate increases work to slow inflation 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 economy is defying predictions that inflation would not fall without significant job destruction,” said Lael Brainard, the director of the National Economic Council, during a speech on Wednesday. “This economy is delivering strong results for America’s middle class.”

Republicans have tried to highlight that inflation is still higher than usual – a fact that has eaten into consumer confidence, although it may become less prominent as consumers feel relief from cheaper fuel and find they can replace their aging cars without facing eye-watering price hikes . labels.

“Inflation that is nearly double the Federal Reserve’s target is not a win for American wallets and budgets,” Representative Jason Smith, a Missouri Republican who chairs the House Ways and Means Committee, said in an emailed statement, referring to the core inflation rate.

Inflation remains above the rate of increase that was normal before the 2020 pandemic, and it is still much faster than the Fed’s 2 percent target. The Fed 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 if central bankers are taking 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 could 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. Jerome H. Powell, the Fed chair, has repeatedly said that there was a “narrow path” to achieving one: There are few if any historical examples of the Fed struggling to keep inflation significantly lower without tapering off.

Challenges continue to loom. The economy has momentum and the labor market is strong, which could give companies the wherewithal to continue raising prices. The ongoing war in Ukraine could always escalate, driving up commodities.

But there are also factors that could help: China’s rebound was weaker than expected, meaning fewer buyers are competing for goods in global markets. Consumers are buying fewer retail goods, and while spending on services is not falling, it has been gradually slowing.

And as those trends combine with inflation falling more convincingly, the odds of a mild cooling may be improving.

“Powell’s point is that ‘it’s a narrow path to a soft landing,'” said Michael Feroli, chief U.S. economist at JP Morgan. “It looks maybe a little wider now.”

Alan Rappeport, Joe Rennison and Lydia DePillis contributed reporting.

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