Inflation continued to plummet in June, the Bureau of Labor Statistics reported Friday, falling three-tenths of a percentage point to a 1.6 percent annual rate.
The drop in the inflation rate was even bigger than analysts' expectations, which were for 1.7 percent rate of increase in the Consumer Price Index.
Inflation was as high as 2.7 percent in February. Then, faster rising prices gave the Federal Reserve confidence that the economy was finally reaching full capacity, after five years of inflation running below the central bank's target. The higher inflation readings gave the Fed enough confidence in the health of U.S. commerce to raise its interest rate target in March and again in June, penciling in a third rate hike for later this year.
Since then, however, inflation has dropped in each month. That trend is likely to make Chairwoman Janet Yellen and other Fed officials rethink the timing of more rate increases.
The Fed targets 2 percent inflation, although it uses a different gauge than the one published Friday.
Setting aside changes in the prices of food and energy, which are typically more volatile than other prices, "core" inflation was slightly higher, at 1.7 percent in June, unchanged from May. Core inflation, which investors and officials look at because it's generally more predictive of the future than the headline inflation rate, has also dropped off since the start of the year, when it hit as high as 2.3 percent.
The recent slowdown in inflation can partially be attributed to one-off factors, such as a bidding war between cell service providers that has led to a proliferation of unlimited data plans. The availability of those unlimited plans translates to steeply falling wireless prices in the Consumer Price Index.
On Thursday, Yellen told a Senate panel that "it's premature to conclude that the underlying inflation trend is falling well short of 2 percent. I haven't reached such a conclusion."