Inflation has been a thorn in the Federal Reserve’s side for over a year now, but after June’s headline reading of 3%, Central Bank officials are inching closer to their 2% mandate.

The consumer price index (CPI), which measures the price fluctuations of a broad basket of goods and services in the U.S., increased by 3% for the 12 months ending in June, the smallest 12-month increase since March 2021, the U.S. Bureau of Labor Statistics (BLS) reported Wednesday.

Core inflation, which excludes the volatile food and energy components of consumer spending, rose 4.8% over the last 12 months, which was below consensus expectations of 5% and the lowest level since October 2021.

“This report’s results should be encouraging to the Fed that their goals of taming inflation are achievable, but their hawkish tilt is likely to remain intact until an annualized trend below 2.0% has been established,” said PNC Senior Economist Kurt Rankin in an email to The Dallas Express.

While June’s CPI report offers some encouragement that the Fed may be close to quelling inflation, many consumer goods and services are still up over the last 12 months.

Indexes that are up year over year include food (+5.7%), food at home (+4.7%), food away from home (+7.7%), electricity (+5.4%), new vehicles (+4.1%), apparel (+3.1%), medical care commodities (+4.2%), shelter (+7.8%), and transportation services (+8.2%).

Indexes that are down on the year include: energy (-16.7%), utilities/gas service (-18.6%), used cars and trucks (-5.2%), and medical care services (-0.8%).

When looking at the month-over-month change, CPI data shows that consumer prices rose 0.2% in June after increasing 0.1% in May.

According to the report, the index for shelter was the largest contributor to the month-over-month increase, accounting for over 70%. The index for motor vehicle insurance also contributed to the monthly all-item increase. Other monthly increases were seen in the food index (+0.1%), food away from home (+0.4%), and energy (+0.6%).

“Energy prices rebounded to a +0.6% monthly gain in June 2023 after falling sharply in May,” Rankin told The Dallas Express. “Overall, energy prices are down by 16.5% versus one year ago, relieving some pressure on household budgets but also freeing money to tempt consumers into continued demand, which will keep pressure on inflation — and therefore Fed policy hawkishness — in place through the third quarter.”

He continued, “PNC continues to forecast a recession beginning in late 2023, largely based upon consumers’ inability to maintain their spending pace given inflation’s slow crawl toward normalization and the higher interest rate cost of consumer debt that has bridged the gap between incomes and price increases for many households over the past two years.”

After 15 months and 10 consecutive rate hikes, the U.S. Federal Reserve finally chose to “skip” a rate increase in June, holding the benchmark federal funds between 5% and 5.25%. Fed officials made this decision because it would give them time “to assess additional information and its implications for monetary policy,” Fed Chair Jerome Powell said in his policy statement.

Considering headline inflation peaked at 9.1% in June 2022, last month’s headline reading of 3% is a welcoming sign that suggests the worst may be behind us.

However, while the latest data show inflation moving in the right direction, Rankin suggests that the accumulation of “damage over the past two years,” could eventually lead to a “recession beginning in late 2023.”

According to the Fed’s updated Summary of Economic Projections, officials see a median projected fed funds rate of 5.6% by the end of 2023.

“This suggests two additional fed funds rate hikes over the rest of 2023. But the dot plot does point to potential rate cuts in 2024, with the median rate at the end of next year at 4.6%,” PNC Chief Economist Gus Faucher told The Dallas Express in June.

Fed officials will determine whether to approve an 11th rate increase or to hold steady during their next two-day policy meeting on July 25-26.