Inflation cools more than expected in June as gas costs fall, underlying prices ease

WASHINGTON (AP) — U.S. inflation cooled last month as the cost of gas, clothes, and used cars fell, providing some relief to consumers, while underlying price pressures also cooled more than expected.

Prices dropped 0.4% from May to June, the largest monthly drop in four years, the Labor Department said Tuesday. On a yearly basis, inflation declined to 3.5%, down from a year-over-year gain of 4.2% in May and lower than many economists expected.

Excluding the food and energy categories, core prices were unchanged in June, a positive sign that underlying inflation is cooling. On a yearly basis, core prices rose just 2.6%, down from 2.9% the previous month. Core inflation remains above the Federal Reserve’s target of 2%.

The core figures suggest that the gas price spike from the Iran war, while it pushed up airfares and some other costs, hasn't so far led to broad-based, sustained inflation, economists said.

“This reading is very much in the camp that the inflation we've had this year is transitory,” said Michael Metcalfe, head of macro strategy at State Street Markets. “Yes, gas prices went up, but nothing else did, more or less.”

Tuesday's report likely reduces pressure on the Fed to boost its short-term interest rate to combat inflation. Last month, Fed officials left their key rate unchanged at about 3.6%.

“Today's report gave some breathing room for the Federal Reserve in deciding whether and when to raise interest rates,” Kathy Bostjancic, chief economist at Nationwide Financial, said.

Fed Chair Kevin Warsh, in written testimony to the House Financial Services Committee, said Tuesday that the Fed has “no tolerance” for high inflation, which he pledged would become “a thing of the past.” Yet he provided no hints about what steps the Fed may take in the coming months. Warsh will face questions later Tuesday from members of Congress.

A wider range of prices cooled last month than economists had forecast. Electricity prices, which have been elevated by spiking demand from data centers, fell 1% from May to June, though they are still 4% higher than a year ago. Clothing prices dropped 0.6% from May to June but are 3.9% more expensive than a year earlier.

Groceries rose 0.2% from May to June and are up 2.7% from last year, while apartment rental costs cooled, rising just 0.1% last month and 2.8% from a year ago.