U.S. inflation rate falls to 3%, lowest in over two years

After two years of painfully high prices, inflation in the United States has reached its lowest point in more than two years — 3% in June compared with 12 months earlier — a sign that the Federal Reserve’s interest rate hikes have steadily slowed price increases across the economy.

The inflation figure the government reported Wednesday was down sharply from a 4% annual rate in May, though still above the Fed’s 2% target rate. Over the past 12 months, gas prices have dropped, grocery costs have risen more slowly and used cars have become less expensive. From May to June, overall prices rose 0.2%, up from just 0.1% in the previous month but still comparatively mild.

At the same time, some underlying inflation pressures remain high and a nagging concern for the Fed, which is all but certain to increase its key interest rate again when it meets in two weeks. The Fed has raised its benchmark rate by a substantial 5 percentage points since March 2022, the steepest pace of increases in four decades. Its expected hike this month will follow the central bank’s decision to pause its rate increases last month after 10 consecutive hikes.

Excluding the volatile food and energy prices, core inflation was lower than economists had expected, rising just 0.2% from May to June, the smallest monthly increase in nearly two years. Compared with a year ago, it does remain relatively high, at 4.8%, but down from a 5.3% annual rate in May.

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Some economists have suggested that if inflation keeps slowing and the economy shows sufficient signs of cooling, the July increase could be the Fed’s last.

The year-over-year inflation figure for June marked the mildest such increase since March 2021, when the current bout of painfully high inflation began as the economy roared out of the pandemic recession.

Used-car prices, among other items, have been falling. Automakers are finally producing more cars as supply shortages have abated. New-car prices, too, have begun to ease as a result.

A sustained slowdown in inflation could bring meaningful relief to American households that have been squeezed by the price acceleration that began two years ago. Inflation spiked as consumers ramped up their spending on items like exercise bikes, standing desks and new patio furniture, fueled by three rounds of stimulus checks. The jump in consumer demand overwhelmed supply chains and ignited inflation.

Many economists have suggested that President Joe Biden’s stimulus package in March 2021 intensified the inflation surge. At the same time, though, inflation also jumped overseas, even in countries where much less stimulus was put in place. Russia’s invasion of Ukraine also triggered a spike in energy and food prices globally.

Now, though, gas prices have fallen back to about $3.50 a gallon on average, nationally, down from a $5 peak last year. And grocery prices are rising more slowly, with some categories reversing previous spikes.

Egg prices, for instance, have declined to a national average of $2.67 a dozen, down from a peak of $4.82 at the start of this year, according to government data. Egg costs had soared after avian flu decimated the nation’s chicken flocks. Despite the decline, they remain above the average pre-pandemic price of about $1.60. Milk and ground beef remain elevated but have eased from their peak prices.

Still, the cost of services, like restaurant meals, car insurance, child care and dental services, continue to rise rapidly. Auto insurance, on average, now costs 17% more than it did a year ago.