US inflation drops below 3%, teeing up rate cuts

This solidifies expectations that the Federal Reserve will finally cut interest rates in September

Shopper in Virginia grocery store
It was the first time since March 2021 that inflation fell below 3%
(Image credit: Sha Hanting / China News Service / VCG via Getty Images)

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. 

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Peter Weber, The Week US

Peter has worked as a news and culture writer and editor at The Week since the site's launch in 2008. He covers politics, world affairs, religion and cultural currents. His journalism career began as a copy editor at a financial newswire and has included editorial positions at The New York Times Magazine, Facts on File, and Oregon State University.