US consumer inflation cools to lowest since early 2021

US consumer inflation cooled in June to its lowest rate since early 2021, according to government data released Wednesday -- an encouraging sign for policymakers battling cost-of-living pressures.

The key inflation gauge, the consumer price index (CPI), rose 3.0 per cent from a year ago last month, the smallest increase since March 2021 and down from 4.0 per cent in May, said the Labor Department.

The US Federal Reserve has raised interest rates rapidly over the last year to ease demand and bring down price growth.

While Fed officials have signaled that further rate hikes are likely needed to bring inflation back to their two percent target, the June CPI report will heighten market doubts about the number of additional increases needed down the line.

"Today's report brings new and encouraging evidence that inflation is falling while our economy remains strong," President Joe Biden said in a statement, lauding the progress made while maintaining low unemployment.

In a further positive sign, Labor Department data showed that the monthly "core" rate -- excluding the volatile food and energy components -- came to its lowest reading since late 2021, at 0.2 per cent.

Wall Street stocks surged after the report, closing higher on hopes that inflation can come down without the world's biggest economy tipping into a recession.

"The economy is defying predictions that inflation would not fall absent significant job destruction," Lael Brainard, director of the National Economic Council, said in remarks to the Economic Club of New York.

While "too many Fed officials have made it clear that they think further hikes are needed," suggesting another bump this month, a good CPI reading could change prospects as to whether a rise in September is still needed, Pantheon Macroeconomics said in a report.

According to the latest Labor Department data, the index for shelter remained the "largest contributor" to the overall monthly CPI increase and the index for car insurance also contributed -- but other areas saw declines including airfares and used vehicles.

"We know rents are going to roll over, over the next several months, so we're going to see a lot of disinflation coming through the rest of this year," said Ryan Sweet, chief US economist at Oxford Economics.

"That's good news for consumers," he told AFP, adding that he expects the Fed could end its tightening cycle in July.

"The labor market is showing signs of softening, inflation is coming down, we're still on that path to a soft landing, but it's a very narrow path," Sweet said.

The easing of underlying inflation was driven by a "plunge in airline fares" and dip in hotel room rates, along with a drop in used vehicle prices, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Although insurance and repair costs have rocketed over the past year, "flattening demand and rising inventory are now pushing new vehicle prices down" after a surge, he said. Insurance and repair inflation will follow, he added.

Key parts of inflation highlighted by Fed Chair Jerome Powell, including the core readings for goods and services, have "slowed to end the second quarter," said Rubeela Farooqi, chief US economist at High Frequency Economics.

"While inflation remains elevated, the deceleration will be welcome news to policymakers," she added in a note.

But these data are not likely to change the outcome of a Fed officials' meeting later this month, with a rate hike of 25 basis points the most likely outcome, Farooqi said.