Wednesday's Consumer Prices Index report brought welcome news for US consumers: Prices in June rose at their slowest annual pace since March 2021.
But the data makes the Federal Reserve's path forward even murkier than before.
"We do not have a strong conviction on what the Fed is likely to do in September and beyond," Jefferies US economist Thomas Simons wrote on Wednesday.
Core inflation, which strips out the more volatile costs of food and gas, climbed 4.8% over the last year. The increase was lower than the 5.0% economists had expected but starkly above the Fed's 2% goal.
With inflation still above the Fed's target and the labor market still showing signs of tightness, Wednesday's release did little to influence the broad consensus that another 25 basis point interest rate hike is coming from the central bank on July 26. But it did spark further discussion on what comes next after the July meeting.
Futures markets tied to Federal Reserve's benchmark interest rate are now pricing in a 27% chance the Fed will increase interest rates by 50 basis points by the end of November. There was a 36% chance of two hikes just a day before the CPI print.
Economists at Citi have been calling for two more rate hikes since before the Fed paused the hiking campaign at its June meeting. Now, that picture is starting to shift.
"While just one month of slowing CPI implies a July hike is still very likely, softer CPI does raise the bar for a September hike, which could instead be pushed to November," Citi economists Veronica Clark and Andrew Hollenhorst wrote on Wednesday.
Speaking at an event in Maryland after Wednesday's release, Richmond Fed President Thomas Barkin said he needs to be "convinced" that incoming data will continue to bring inflation down lower, according to Reuters.
And the path for that final drop in inflation could take longer than the precipitous drop in headline inflation over the last year, economists say. Wells Fargo senior economist Sarah House sees one more rate hike in July "then done," but noted that prices for food and energy have been largely stable in 2023.
This could challenge core inflation's path below 3% even if car and housing prices continue to slide, House argued.
"With the underlying trend in inflation likely to be stuck closer to 3% than 2%, rate cuts remain a long way off, in our view, House wrote on Wednesday.
House added: "A timely and sustained return to the FOMC's 2% inflation target remains far from assured. Wages may no longer be accelerating, but the tight jobs market is keeping labor costs growing in excess of the range that is consistent with 2% inflation over time."
