By Gwynn Guilford

U.S. inflation eased last month to its slowest pace in more than two years as underlying price pressures cooled more than expected.

The consumer-price index climbed 3% in June from a year earlier, the Labor Department said Wednesday, sharply lower than the recent peak of 9.1% in June 2022 and down from 4% in May. Inflation was last close to 3% in March 2021.

Still, inflation remains above the Federal Reserve's 2% target. Fed officials have signaled that they are likely to raise interest rates to a 22-year high at their July 25-26 meeting, following recent signs of stronger-than-anticipated economic activity. Wednesday's inflation report isn't expected to change that outcome.

Last month officials kept their benchmark federal-funds rate in a range between 5% and 5.25%. That was their first pause after 10 consecutive increases since March 2022, when they raised it from near zero. Most of them in the June meeting penciled in two more increases this year.

So-called core consumer prices, which excludes volatile food and energy categories, rose 4.8% in June from a year earlier, the slowest pace since October 2021 and down from 5.3% in May. Economists had estimated that core prices rose 5%.

Overall consumer prices increased a seasonally adjusted 0.2% in June from the prior month, compared with May's 0.1% gain. Core consumer prices climbed 0.2%, the smallest one-month increase since August 2021, suggesting underlying price pressures are gradually easing. Prices for used cars and airline fare fell sharply, while prices for car insurance and recreation rose. Rent increased in June, though at the slowest one-month pace since early 2022.

Fed officials are focused on cooling stubbornly high core inflation, and see core prices as a better predictor of future inflation than the overall inflation rate.

Rising car prices, strong demand for labor-intensive services and an earlier surge in housing-rental prices have contributed to core inflation.

"Where inflation is proving sticky is in services--getting haircuts, getting your car repaired, buying car insurance," said Leo Feler, chief economist at Numerator.

-Christian Robles and Nick Timiraos contributed to this article.

Write to Gwynn Guilford at gwynn.guilford@wsj.com


(END) Dow Jones Newswires

07-12-23 0907ET