The June consumer price index showed inflation cooling more than expected, but the Federal Reserve is still widely expected to raise interest rates at its September meeting. The data, released Wednesday, offered a rare sign of relief for households and businesses battered by rising costs. Yet the central bank's cautious stance suggests it won't let up on its tightening campaign just yet.
What the CPI Numbers Show
Inflation eased to an annual rate of 3% in June, down from 4% in May and well below the 9.1% peak hit last year. Core inflation, which strips out volatile food and energy prices, also slowed to 4.8% from 5.3%. The report marked the smallest 12-month increase since March 2021, a clear sign that the Fed's aggressive rate hikes are starting to cool the economy.
But the central bank's preferred measure, the personal consumption expenditures index, still runs above its 2% target. And the labor market remains tight, with unemployment at 3.6% and job openings still elevated. That combination keeps the Fed wary of declaring victory too soon.
Why Another Hike Is Still Expected
Fed officials have repeatedly signaled that they see two more quarter-point rate increases this year, with the next one likely in September. Chair Jerome Powell has stressed that the central bank will move carefully but won't hesitate to raise rates if inflation proves stubborn. The June CPI report, while encouraging, doesn't change that calculus for most policymakers.
Market pricing reflects that expectation. Traders see a roughly 70% chance of a quarter-point hike in September, according to CME Group's FedWatch tool. The Fed's own projections, released in June, show the median rate forecast rising to 5.6% by year-end, implying two more moves.
The Strain on Growth and Markets
Persistent rate hikes come with risks. Higher borrowing costs have already slowed the housing market and squeezed corporate profits. If the Fed keeps tightening, it could tip the economy into a recession. The yield curve has been inverted for months, a classic recession warning. Stock markets have wobbled, with the S&P 500 down about 2% since the CPI release as investors digest the prospect of more tightening.
Small businesses and consumers are feeling the pinch. Credit card rates have hit record highs, and mortgage applications have fallen to their lowest level in decades. The Fed's own staff economists have penciled in a mild recession later this year, though officials publicly maintain a soft landing is still possible.
Fed's Cautious Stance Highlighted
The central bank's messaging has been consistent: it will keep rates high until inflation is clearly headed back to 2%. The June CPI report doesn't provide that certainty. Core inflation, while lower, is still running at nearly double the target. And services inflation, driven by wages, remains sticky.
Powell has said the Fed can afford to be patient, but not complacent. The cautious stance means the central bank is likely to skip a rate hike at its July meeting, then deliver one in September. That would give policymakers more time to assess incoming data, including the July CPI report due in August.
The next big test comes in September, when the Fed will have two more months of inflation and jobs data to weigh. If inflation continues to cool, the case for a pause will grow. But for now, the market is betting on one more hike.
