June Inflation Report: Inflation Continues to Cool

The marked decline would come partly because prices this year are being measured against very high prices from last summer, and the cost of gas in particular has come down compared with last summer. But the improvement is expected to extend beyond those headline annual numbers to a monthly measure that strips out food and fuel prices to give a sense of the underlying trend in price pressures. That “core” measure is expected to have picked up about 0.3 percent — the first time it would have climbed by less than 0.4 percent in seven months.

Such a pullback would be unquestionably good news, and a sign that inflation is cooling back toward the Federal Reserve’s 2 percent goal. But economists have said that even the notable slowdown would not show the Fed that inflation has been fully defeated, and that would probably not be enough to convince officials not to raise interest rates again when they meet on July 25-26.

“They have been surprised by the C.P.I. before,” Alan Detmeister, a former Fed economist who is now at UBS, said ahead of the release. “They’re a little concerned about being head-faked again.”

Inflation is expected to have cooled in June for a few big reasons. Market-based rent prices have been climbing much more slowly or even falling in some markets over the past year, and that is gradually feeding into official inflation data in what should be a lasting trend. Used car prices, which unexpectedly jumped earlier this year, are headed lower. And a range of products and services, including airfares and hotel rooms, are expected to decline or climb slowly in price in this month’s data.

But that final category could overstate how much inflation is pulling back, Mr. Detmeister said. Inflation data are adjusted to smooth over seasonal trends. But because prices for some products and services — including travel-related prices — have swung around a lot in recent years, those seasonal adjustments are funky right now. They will probably pull inflation down this summer before pushing it back up this fall.

That means that while there are real reasons for hope in the cooling inflation data, the Fed will probably be cautious about taking a victory lap.

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

The central bank has been raising interest rates since early 2022 to try to wrangle price increases by cooling the economy. Officials skipped a rate increase at their June meeting to give themselves more time to see how the economy was absorbing higher borrowing costs.

But policymakers have been clear that they think they will need to raise rates higher to ensure that inflation returns fully and quickly to their 2 percent target, which they define using a more delayed but related inflation measure.

Many economists expect them to raise rates this month even if the Consumer Price Index inflation figures show a notable moderation — though some, like Mr. Detmeister, think that softening inflation figures could make officials less likely to lift rates again this year.

John C. Williams, president of the Federal Reserve Bank of New York, called some of the slowdown in inflation so far — the part coming from cheaper fuel and more modest price increases for goods — a “free lunch.”

“It’s really a reversal of some of the pandemic-related effects and a relaxation of the supply-chain bottlenecks,” he said in an interview with the Financial Times. But “to get inflation all the way to 2 percent, it will take not only getting the demand for labor further down but some increase in unemployment.”