Inflation has been bruising Americans for more than two years — and it's finally losing some of its punch.
The Labor Department reported Wednesday that the consumer prices in June were up just 3% from a year ago — the smallest annual increase since March 2021. What's more, forecasters say inflation could fall further in the months to come.
But two years of high inflation has left its scars, and people are adjusting their habits, potentially in permanent ways.
Here are five things to know about the state of inflation today.
Inflation has fallen sharply from its peak last year
It was a totally different picture this time last year. Back then, inflation had topped 9%, fueled in part by record-high gasoline prices following Russia's invasion of Ukraine.
Since then, gasoline prices have tumbled more than 26%. And that's having a big impact on the day-to-day lives of many Americans, especially commuters like Kate Blacker from Jersey City, N.J., who travels about an hour each day to her job at a community college.
"I'm a lot less worried now than I was six months ago, eight months ago, when the prices were rising so rapidly and I didn't know when that was going to cool down," says Blacker.
Grocery prices also leveled off last month, in a welcome relief to consumers' budgets.
And in another positive development in the midst of the summer, the price of airline tickets and hotel rooms fell in June, despite strong demand for travel.
Inflation likely has further to fall
Here's more good news: Even lower inflation rates are in the pipeline. Rent was a big driver of inflation in June, but people signing new apartment leases this summer are seeing smaller rent increases than they did a year ago.
That takes time to show up in the government's inflation tally, but the writing is on the wall.
Likewise, the wholesale price of used cars has been falling for several months, so those savings should continue to produce lower prices on dealers' lots.
Omair Sharif, who heads the forecasting firm Inflation Insights, believes the next several months will be marked by mild cost-of-living increases, much like June was.
"This is kind of the leading edge of the summer of disinflation," Sharif says.
Companies may no longer be able to pad their profits
Economist Lael Brainard says some companies added to their profit margins during the last two years of strong inflation — a trend that could soon be reversed.
Brainard served as Vice Chair of the Federal Reserve board before moving to the White House in February to direct the National Economic Council. She points to what she calls a "price-price" spiral, when companies see their costs go up, then raise their own prices even more.
"It will be important for corporations to continue to bring their markups down after having raised them to unusually elevated levels over the past two years," Brainard told the Economic Club of New York Wednesday.
Brainard says those higher markups "should unwind if consumers are more price-sensitive and firms have to compete more intensely."
Many people are becoming more careful shoppers
Two years of high inflation has left a mark on the way people spend money, and some of those changes may be lasting.
Blacker, for example, postponed a trip to Los Angeles this summer, hoping to find cheaper plane tickets in the fall. She also canceled her gym membership, and says she and her partner are more thoughtful now about their food purchases than they used to be.
"We didn't really look so much at the grocery prices before," Blacker says. "It was more like, 'Oh, let's look up a recipe and just get whatever it is that we need.' "
With restaurant prices still climbing, she's also eating out less often.
"It's something we have to be much more conscious about, in terms our budgeting for that," Blacker says.
The Federal Reserve is not ready to declare victory just yet
The data showing easing inflation on Wednesday will likely be greeted as welcome news to the country's inflation fighters, but the battle is probably not over.
The Fed has raised interest rates aggressively over the last 16 months in an effort to curb demand and bring prices under control.
Although the central bank opted to hold rates steady at its last meeting in June, forecasters expect at least one additional, quarter-point rate hike when Fed policymakers meet in two weeks.
If inflation continues to trend down, however, that may just be the last increase in this cycle.
ADRIAN FLORIDO, HOST:
Inflation, which has been bruising Americans for more than two years, is finally losing some of its punch. Today, we learned that the cost of living in June was up just 3% from a year ago. That is the smallest annual increase since March of 2021. And what's more, forecasters say inflation could fall even more in the months to come.
NPR's Scott Horsley joins us now. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Adrian.
FLORIDO: Sounds like some welcome news, Scott. What is behind this drop in inflation?
HORSLEY: Well, one big factor is gasoline. Remember, a year ago, gas prices hit an all-time high after Russia's invasion of Ukraine. Since then, gas prices have tumbled more than 26%. That's a big relief for people like Kate Blacker. She lives in Jersey City, N.J., and commutes about an hour each way to her job at a community college.
KATE BLACKER: I'm a lot less worried now than I was six months ago, eight months ago, when the prices were rising so rapidly, and I didn't know when that was going to cool down.
HORSLEY: Inflation has cooled dramatically since hitting a four-decade high a year ago. It's now fallen for 12 consecutive months. Last month, we saw falling prices for airfares and for used cars. Grocery prices also leveled off in June, although the price of restaurant meals continues to climb.
FLORIDO: And why do forecasters think that inflation is going to keep falling over the next several months?
HORSLEY: Well, some price reductions are already in the pipeline. Take rent, for example - people who are signing new leases on apartments this summer are seeing smaller rent increases than they did a year ago. That takes time to make its way into the government's inflation measure, but the writing is on the wall. Likewise, the price that dealers pay for used cars at auction has been coming down for several months now, so we should see further savings on used car lots.
Economist Lael Brainard, who used to serve on the Federal Reserve Board and is now at the White House, also noted today that some corporations have kind of taken advantage of inflation to pad their profit margins. If their own costs went up maybe 5%, they raised their prices 10%. Brainard told the Economic Club of New York today she expects those extra profits will get wrung out over time.
(SOUNDBITE OF ARCHIVED RECORDING)
LAEL BRAINARD: It'll be important for corporations to continue to bring their markups down after having raised them to unusually elevated levels over the past two years, which would help in reducing inflation.
HORSLEY: Brainard says chipping away at those extra profits depends on competition and people like you and me, Adrian, getting more price sensitive.
FLORIDO: I know I certainly have, but are customers across the country are becoming more careful shoppers?
HORSLEY: Some of them certainly are. Two years of high inflation has left a mark on the way people spend money, and some of those changes could be lasting. For example, Kate Blacker says she and her partner are much more thoughtful now about their food purchases than they used to be.
BLACKER: We didn't really look so much at the grocery prices before. It was more like, oh, let's look up a recipe and just get whatever it is that we need for that recipe. And we also used to eat out a lot more, and now it's something that we have to be much more conscious about in terms of our budgeting for that.
HORSLEY: Blacker also says she's cut back on concert tickets and even canceled her gym membership.
FLORIDO: Well, the Federal Reserve has aggressively raised interest rates in an effort to curb this inflation. Is it ready to declare that it's won?
HORSLEY: Not just yet. Inflation is still above the Fed's target, which is 2%, and analysts are fairly sure the Fed's going to raise interest rates at least once more when policymakers meet in a couple of weeks. If inflation continues to trend down, however, that could be the last interest rate hike for a while. And if so, that would reduce the risk of rising rates tipping the economy into a recession.
FLORIDO: NPR's Scott Horsley. Thanks, Scott.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.