Inflation cooled more than expected in June, widening the Federal Reserve’s path toward its first rate cut and providing more comfort that prices increases are under control after three consecutive months of declines.
Thursday’s report from the Labor Department is welcome news for the Fed, adding to evidence that inflation is heading back toward its target of 2%. Fed officials have been closely monitoring economic data as they decide when they should make the first cut after ramping their benchmark interest rate up to 5.3% and holding it there for the last year. Higher interest rates cool economic activity through higher borrowing costs for things like credit cards, auto loans and business loans.
Recent upticks in unemployment and a slowdown in household consumption are indicators that the economy has cooled, bringing the rate of price increases down with it. The task for the Fed is to time its first cut correctly to keep inflation in check without sending the economy into a tailspin. Fed officials came into 2024 expecting to move forward with several cuts to its benchmark rate, but a rocky start to the year with upticks in inflation scaled back those expectations. Officials are now expecting one or two cuts this year, only after they have seen sufficient evidence that inflation is returning to its target range.
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