Why inflation is losing its punch — and why things could get even better

Inflation has been bruising Americans for more than two years — and it's finally losing some of its punch.

The Labor Department reported Wednesday that the consumer prices in June were up just 3% from a year ago — the smallest annual increase since March 2021. What's more, forecasters say inflation could fall further in the months to come.

But two years of high inflation has left its scars, and people are adjusting their habits, potentially in permanent ways.

Here are five things to know about the state of inflation today.

Inflation has fallen sharply from its peak last year

It was a totally different picture this time last year. Back then, inflation had topped 9%, fueled in part by record-high gasoline prices following Russia's invasion of Ukraine.

Since then, gasoline prices have tumbled more than 26%. And that's having a big impact on the day-to-day lives of many Americans, especially commuters like Kate Blacker from Jersey City, N.J., who travels about an hour each day to her job at a community college.

"I'm a lot less worried now than I was six months ago, eight months ago, when the prices were rising so rapidly and I didn't know when that was going to cool down," says Blacker.

Grocery prices also leveled off last month, in a welcome relief to consumers' budgets.

And in another positive development in the midst of the summer, the price of airline tickets and hotel rooms fell in June, despite strong demand for travel.

Inflation likely has further to fall

Here's more good news: Even lower inflation rates are in the pipeline. Rent was a big driver of inflation in June, but people signing new apartment leases this summer are seeing smaller rent increases than they did a year ago.

That takes time to show up in the government's inflation tally, but the writing is on the wall.

Likewise, the wholesale price of used cars has been falling for several months, so those savings should continue to produce lower prices on dealers' lots.

Omair Sharif, who heads the forecasting firm Inflation Insights, believes the next several months will be marked by mild cost-of-living increases, much like June was.

"This is kind of the leading edge of the summer of disinflation," Sharif says.

Companies may no longer be able to pad their profits

Economist Lael Brainard says some companies added to their profit margins during the last two years of strong inflation — a trend that could soon be reversed.

Brainard served as Vice Chair of the Federal Reserve board before moving to the White House in February to direct the National Economic Council. She points to what she calls a "price-price" spiral, when companies see their costs go up, then raise their own prices even more.

"It will be important for corporations to continue to bring their markups down after having raised them to unusually elevated levels over the past two years," Brainard told the Economic Club of New York Wednesday.

Brainard says those higher markups "should unwind if consumers are more price-sensitive and firms have to compete more intensely."

Many people are becoming more careful shoppers

Two years of high inflation has left a mark on the way people spend money, and some of those changes may be lasting.

Blacker, for example, postponed a trip to Los Angeles this summer, hoping to find cheaper plane tickets in the fall. She also canceled her gym membership, and says she and her partner are more thoughtful now about their food purchases than they used to be.

"We didn't really look so much at the grocery prices before," Blacker says. "It was more like, 'Oh, let's look up a recipe and just get whatever it is that we need.' "

With restaurant prices still climbing, she's also eating out less often.

"It's something we have to be much more conscious about, in terms our budgeting for that," Blacker says.

The Federal Reserve is not ready to declare victory just yet

The data showing easing inflation on Wednesday will likely be greeted as welcome news to the country's inflation fighters, but the battle is probably not over.

The Fed has raised interest rates aggressively over the last 16 months in an effort to curb demand and bring prices under control.

Although the central bank opted to hold rates steady at its last meeting in June, forecasters expect at least one additional, quarter-point rate hike when Fed policymakers meet in two weeks.

If inflation continues to trend down, however, that may just be the last increase in this cycle.