Annual Inflation Dropped to 3% in June

What happened

The Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services, rose 0.2% in June compared to May. But on an annual basis, the index is up just 3% from a year prior. That's a vast improvement from previous readings, and it may be enough to prevent any more interest rate hikes from the Federal Reserve this year.

So what

Inflation has been wreaking havoc on consumers since mid-2021, forcing many people to raid their savings and take on debt just to keep up with basic expenses. The fact that annual inflation has crept downward to 3% means that consumers may finally be in for some relief when it comes to everyday essentials.

“We don’t have to worry quite as much as we were about rising prices,” William Ferguson, economics professor at Grinnell College in Iowa, told CNN in response to June's CPI report.

For context, last June, the CPI measured annual inflation at 9.1%. This June's reading shows that consumer prices aren't up to nearly the same extreme.

Now what

The Federal Reserve has been raising interest rates since March 2022 in order to cool inflation. In fact, it had raised interest rates for 10 consecutive meetings before halting that practice at its most recent June 2023 gathering.

In light of the latest CPI reading, the Fed may decide to continue to pause interest rate hikes and see if inflation continues to moderate. The Fed's ultimate goal is to get annual inflation back down to the 2% mark. It's this level, the central bank feels, that's most conducive to economic stability.

Now to be clear, 2% inflation is inflation nonetheless. The cost of living tends to rise over time, and that's something consumers should anticipate and prepare for -- namely, by not maxing out their paychecks on expenses in case their bills rise from one year to the next and their wages can't keep up. It's especially helpful to keep larger expenses, like housing, on the low side to allow for the continuously rising cost of goods and services.

Meanwhile, a pause in interest rate hikes would be a good thing for consumers who are grappling with sky-high borrowing costs on the heels of the Fed's recent moves. These days, it costs more money to borrow in just about any form, from credit cards to personal loans.

Of course, consumers will still need to borrow judiciously and be careful in how they spend. Though annual inflation has cooled, grocery prices, for example, are still up 4.7% from a year ago, while electricity costs are up 5.4%. But all told, June's CPI report is encouraging.