Consumer prices rose at the slowest pace since March 2021 as inflation showed further signs of cooling in June, according to the latest data from the Bureau of Labor Statistics released Wednesday morning.

The Consumer Price Index (CPI) rose 0.2% over last month and 3% over the prior year in June, a slight acceleration from May's 0.1% month-over-month increase but a slowdown compared to the month's 4% annual gain.

Both measures were slightly better than economist forecasts of a 0.3% month-over-month increase and a 3.1% annual increase, according to data from Bloomberg.

On a "core" basis, which strips out the more volatile costs of food and gas, prices in June climbed 0.2% over the prior month and 4.8% over last year. Both measures were also slightly better than economist expectations.

The monthly core increase was the smallest one-month increase in that index since August 2021.

Core inflation remained especially sticky last month as rent prices continue to surge. The index for rent and owners' equivalent rent rose 0.5% and 0.4%, respectively, on a seasonally adjusted basis. Owners' equivalent rent is the hypothetical rent a homeowner would pay.

The shelter index, which jumped 7.8% annually and 0.4% between May and June on a seasonally adjusted basis, was the largest factor in the monthly increase of core inflation, accounting for over 70% of the increase.

Among the other indexes that rose in June was the index for motor vehicle insurance, which increased 1.7%, and the index for apparel, which increased 0.3%. The indexes for recreation and personal care also increased last month, the BLS noted.

Still, other indexes did see prices soften such as airline fares, which fell 8.1%, along with the prices for used cars, which dropped 5.2% year-over-year.

The energy index decreased 16.7% for the 12 months ending in June, although prices increased 0.6% on a seasonally adjusted month-over-month basis after falling 3.6% in May's report.

The food index increased 5.7% over the last year with food prices rising 0.1% from May to June. Egg prices fell another 7.9% last month after dropping 13.8% in May and 1.5% in April.

US stocks moved higher in early trading following the release of the data. Treasury yields fell about eight basis points to around 3.9% as economists championed the report.

"Headline inflation is plunging for consumers," Chris Rupkey, FWDBONDS chief economist, wrote in reaction to the data. "CPI inflation peaked at 9.1% year-on-year last June 2022 and today it is at a new low for the year at 3% year-on-year. The economy is on a safer path today as victory over inflation is in the air. Even core inflation is down in the dumps with a 0.2% rise which is the softest print since August 2021."

Eugenio Aleman, chief economist at Raymond James, added: "June’s CPI report was better than what markets were expecting. ...However, as the report indicates, shelter costs remained strong during the month and represented more than 70% of the increase in the monthly index."

"This means that if, as we expect, shelter costs start to weaken considerably during the second half of the year, the prospects for much lower inflation readings are looking promising. If we don’t have much lower readings for shelter cost and also base effects, we may see higher year-over-year inflation until the end of this year," the economist continued.

Although the 3% jump in headline inflation represents a continued slowdown, it's still significantly above the Federal Reserve's 2% target.

That, along with last week's jobs report data that showed a resilient labor market with low unemployment and high wages, suggests the Federal Reserve will continue to raise interest rates this year.

Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly both signaled on Monday more rate hikes were needed to tame inflation.

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Investors will be closely monitoring comments from central bank officials including Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, Richmond Fed President Tom Barkin, and Cleveland Fed President Loretta Mester, who are all expected to speak on US economic policy throughout Wednesday.

The central bank paused its aggressive rate hiking cycle in June but implied it will likely raise rates by 0.25% two more times this year (or raise rates by 0.50% in one shot).

"Rapid disinflation in June illustrates the difficult position the Fed finds itself in," EY economist Greg Daco wrote in a note to clients following the report. "After foregoing a rate hike last month, Fed Chair Powell and most policymakers have made clear they will raise the federal funds rate at the upcoming July FOMC meeting. Yet, inflation dynamics would argue that a rate hike in June would have been more sensible if policymakers truly thought a more restrictive policy stance was required to tame inflation."

Ryan Sweet, chief US economist at Oxford Economics, added, "The Fed has painted itself into a corner as Fed officials' communication has signaled that another rate hike this month is essentially a slam dunk. However, the new data could give the Fed reason to debate whether any further rate hikes after this month are needed."

Immediately following the release of the data, markets were pricing in a roughly 90% chance the Federal Reserve raises rates by another 0.25% at its July 26 policy meeting, according to data from the CME Group.

Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal and email her at [email protected]

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