US inflation drops below 3%, teeing up rate cuts

What happened

U.S. consumer prices rose a modest 0.2% in June and 2.9% year-over-year, the Labor Department said this week. It was the first time since March 2021 that inflation, as measured by the Consumer Price Index (CPI), fell below 3%, solidifying expectations that the Federal Reserve will finally cut interest rates in September.

Who said what

This was the third straight month of cooling prices, providing the "clearest indication yet that inflation is heading back to normal levels from 40-year highs — without a recession," The Washington Post said. A 0.4% increase in housing costs accounted for 90% of the rise in overall prices, but gas is down from a year ago and all in all, "families and households are feeling long-awaited relief from price increases."

"It's a comforting report, both because it is going in the right direction and because it is not doing anything too dramatic,” George Washington University economist Tara Sinclair said to The Associated Press. Investors, The Wall Street Journal said, "have already moved on from worrying about inflation to fretting about the job market."

What next?

The inflation data is "pretty much in line with what the Fed expected and hoped," Douglas Holtz-Eakin, the president of the conservative American Action Forum, said to the Post. And it "essentially guarantees" a September rate cut "unless we get something really bizarre" before then. 

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up