A high-stakes inflation report due Wednesday is expected to show that price pressures within the economy cooled again in June but still remained abnormally high.
Economists expect the consumer price index, which measures a basket of goods, including gasoline, health care, groceries and rent, to show that monthly prices rose 0.3% in June, unchanged from the increase recorded the previous month.
On an annual basis, inflation is projected to have climbed 3.1% – down from 4% in May and a marked drop from the peak of 9.1% in June 2022. That remains well above the pre-pandemic average and the Federal Reserve's 2% target rate.
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"Americans have put the worst of inflation behind, but the war hasn’t yet been won," said Mark Hamrick, senior economic analyst at Bankrate.
Other parts of the report are also expected to point to a slow retreat for inflation, a worrisome sign for the U.S. central bank. Core prices, which exclude the more volatile measurements of food and energy, are expected to climb 0.3% or 5% annually, suggesting that underlying price pressures remain strong.
The Federal Reserve is closely watching the report for evidence inflation is finally subsiding as policymakers try to cool the economy with a series of aggressive interest rate hikes. Officials approved 10 straight rate increases in the span of 15 months, lifting the benchmark federal funds rate from near-zero to the highest level since 2007.
Policymakers paused the tightening campaign in June but in the weeks since then, have signaled that additional rate hikes are on the table amid signs that inflation still remains too high.
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"A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year," Chairman Jerome Powell said at the end of June, referring to the Federal Open Market Committee. "Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go."
The Fed is also taking into consideration other economic indicators, including job growth and consumer inflation expectations.
The June jobs report offered a mixed picture of the economy. Employers added a fewer-than-expected 209,000 jobs last month, but the unemployment rate ticked down to 3.6%.
In a potentially worrisome sign for the central bank, wage growth came in stronger than expected last month, fueling expectations for another rate hike at the end of July.
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The probability that the Fed raises rates during its July 24-25 by a quarter-percentage point jumped to 94.9% on Tuesday afternoon – up from 86.8% the previous week, according to data from the CME Group's FedWatch tool, which tracks trading.
"Payrolls surprise to the downside, but wage growth stays hot, keeping the Fed on course for another hike in July and inclined to hike again before year-end unless inflation pressures slow further," said Bill Adams, chief economist for Comerica Bank, after the latest payroll data.
