In June, the increase in prices slowed more significantly than anticipated, providing further evidence that the high inflation period may be ending. This development might allow the Federal Reserve to lower interest rates, which influence costs from mortgages to credit card payments.

The Consumer Price Index (CPI) rose by 3% year over year in June, which is slower than the 3.3% rate recorded in the previous month. From May to June, prices actually dropped by 0.1%, marking the first substantial monthly decline since May 2020, early in the pandemic.

The Bureau of Labor Statistics’ report on Thursday has raised hopes that the Federal Reserve might cut interest rates in September, offering relief to voters ahead of the November elections, which are expected to heavily depend on the public’s perception of the economy.

Fed Chair Jerome Powell, in his remarks to Congress before Thursday’s report, acknowledged the risks of maintaining high-interest rates for an extended period but emphasized the need for “more good data” on inflation before making any changes. Thursday’s unexpectedly positive report may provide the needed data.

“Core” inflation, which excludes volatile food and energy prices, only increased by 0.1% from May to June, the slowest monthly growth since January 2021. Gasoline prices dropped by 3.8%, and used vehicle prices fell by 1.5%. Shelter costs, which have kept inflation high for months, only rose by 0.2% in June.

While the Fed is unlikely to announce interest rate changes at their meeting later this month, they might hint at a shift during their annual meeting in Jackson Hole, Wyoming, in August.

The Fed has already been under pressure to cut rates as the labor market steadily slows. The unemployment rate is now 4.1%, the highest since February 2018, barring the job loss spike in 2020. Although fears of a recession have lessened since last year, concerns are growing about the rising unemployment rate, which has increased for three consecutive months.

Guy Berger, director of economic research at the Burning Glass Institute, noted in a recent Substack post that the labor market is cooling in a non-recessionary manner since spring 2022. While not yet at a recession tipping point, Berger expressed uncertainty about how far off that point might be.

The Fed uses interest rates to regulate economic growth. Currently, the federal funds rate is around 5.5%, the highest since before the 2008 financial crisis. By keeping rates high, the Fed aims to reduce demand for borrowing for goods and services, thus slowing price increases.

This strategy has been effective. Inflation has dropped significantly since peaking at 9.1% in June 2022 but has remained around 3% throughout this year. Powell told Congress that there has been “modest” progress towards the 2% inflation goal, and inflation expectations remain “anchored,” indicating a low risk of prices rising again rapidly.

Economists attribute this stability to tightened consumer finances since the early pandemic recovery. Wells Fargo economist Sarah House noted that cost-conscious consumers are likely to limit price increases in the service sector, and slower growth in input costs, including labor, reduces the need for such increases.

Some economists and left-leaning lawmakers argue that the Fed has delayed rate cuts too long. Pantheon Macroeconomics Chief Economist Ian Shepherdson recently warned that the Fed might soon be rushing to prevent a significant downturn.