Inflation slowed more sharply than expected in June, easing to an annual rate of 3.5% from 4.2% in May as gasoline prices tumbled. The unexpected cooldown gave the Federal Reserve fresh ammunition to cut interest rates later this year.

The Consumer Price Index fell 0.4% on a seasonally adjusted basis in June, the largest monthly drop since April 2020 when the pandemic locked down the economy. Energy prices crashed 5.7% as the national average gas price fell at the pump.

Core inflation, which strips out volatile food and energy, rose 2.6% on an annual basis, down from 2.9% in May. That beat economist expectations of 2.8%, signaling that underlying price pressures are cooling faster than anticipated. The trend matters because core inflation tells the real story of what’s happening in the economy outside commodity swings.

Where Relief Came From

The energy drop was the big driver. Gas prices fell sharply in early June after crude weakened on recession fears and seasonal demand. Electricity and natural gas also retreated. Without that energy collapse, the headline number would have looked much less impressive.

Used car prices continued their slide, falling 0.8% for the month and now down 4.6% over the past year. Shelter costs—the biggest piece of inflation—continued rising but at a slower clip than before. Airfare, food, and medical care all eased month-over-month.

What’s Next for Interest Rates

Jerome Powell and the Fed had been waiting for signs that inflation was genuinely slowing, not just bouncing around. This report gives them a clearer green light. Market expectations for a September rate cut just jumped. If inflation stays at this level or ticks lower through July and August, a 25-basis-point reduction is all but locked in.

That matters for borrowers. Mortgage rates have been stuck in the high 6s. A Fed cut could pull them down toward 6%, giving some relief to housing shoppers who’ve been priced out for two years.

The key question now is whether June’s drop was real progress or a temporary breather before inflation bounces back. The next CPI report in August will tell us whether this story holds.