Additionally, a key measure of inflation that strips out more volatile categories such as food and energy rose 3.3 percent over the past 12 months — the smallest annual increase since April 2021.

Joe Brusuelas, chief economist at RSM, summed it up this way: “It’s better than good.”

But housing costs continue to be a major driver of overall inflation and have proved hard to tame since there aren’t enough homes available in America. Overall, shelter costs were up 5.2 percent over the year. But they cooled off compared with the previous month, suggesting long-awaited progress is finally breaking through.

The upbeat inflation news was touted by the White House, especially cooling prices for big budget items like cars, appliances, airfares and groceries. The White House also noted its own policies for beating back inflation. Yet political turmoil overshadowed one of the best inflation reports of Biden’s presidency in another example of how difficult it has been for Democrats to sell a strong economy to voters.

Policymakers have been waiting to cement their confidence that inflation is gradually easing. Barring any surprises, economists and Fed watchers quickly rallied around a cut at the central bank’s mid-September meeting.

That kind of timing would bump up against the November presidential election, potentially benefiting Democrats campaigning on a strong job market and solid growth. And it could put more attention, especially from presumptive Republican nominee Donald Trump, on an institution that works hard to stay out of politics.

“A lot can happen between now and September 18, but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified,” Chris Larkin, managing director of trading at E-Trade from Morgan Stanley, wrote in an analyst note.

No matter the timing, a single quarter-point cut won’t overhaul the economy, and financial markets were muted throughout the day. But it would signal that Fed officials are confident that inflation will continue settling down to more normal levels. And it would provide relief for households and businesses feeling the continued strain of high borrowing costs on houses, cars and other loans.

Speaking to reporters Thursday, San Francisco Fed President Mary Daly said tweaking policy in one meeting versus another “just doesn’t have a tremendous effect.” What is notable, she said, are the discussions among Fed policymakers about potential risks to the labor market from keeping rates too high for too long.

“For so long, we have been focused on bringing inflation down and restoring price stability. And now with the labor market in better balance, you’re hearing us talk about that,” Daly said. “This is a fundamentally different conversation than the one we were having before we started the rate-raising campaign,” she added.

Jared Bernstein, chair of the Council of Economic Advisers, told The Washington Post that the report was welcome news for American consumers and wonky inflation-watchers alike. Bernstein said that earlier in the year, as inflation progress backtracked, he expected it would turn out to be more of a pause or bump in the road.

“I certainly understood the nervousness around [the first quarter],” Bernstein said, “but we were on the record suggesting disinflation would pick back up, and that certainly looks like that’s happening.”

For months, real-time measures from firms such as Zillow or Apartment List have shown lease costs easing or even falling for much of the past year. Economists and Fed officials have been waiting for that shift to show up in official government statistics. And they’ve grown frustrated by the delay, since it will be difficult to wrestle inflation all the way down until rent costs let up, too.

The first signs of some cooling finally showed up in June. The thinking is that lags in the way housing data are calculated are working their way through.

Other core parts of Americans’ budgets also saw relief. Gas prices saw a significant drop, falling 3.8 percent in June — more than enough to offset the rise in shelter costs. Energy prices also fell 2 percent, the same level as the month before.

Overall, food prices rose a smidgen. But certain grocery categories gave households relief. Fruits and vegetables, along with cereals and bakery products, fell during June.

Inflation has made major progress since peaking at 40-year highs in 2022. Supply chains have cleared their backlogs, and wages aren’t rising as rapidly since people — especially new immigrants — joined the workforce and filled acute labor shortages. Gas and energy costs also fell, after Russia’s invasion of Ukraine caused them to spike.

Plus, the Fed aggressively raised interest rates to slow the economy down. High borrowing costs typically tamp down demand by discouraging people from buying new houses or expanding businesses. But the Fed has managed to raise rates without causing major slowing in the economy or a recession. And while employers are hiring at a slower pace than last year, they’re keeping up at a healthy clip. The economy added 206,000 jobs in June, and the unemployment rate ticked up slightly to 4.1 percent.

Testifying before Congress this week, Fed Chair Jerome H. Powell said recent job market data “do show that we’ve had considerable cooling in the labor market.” As one example, the ratio of open jobs to available workers has come way down since the pandemic.

The risk, though, is that the Fed keeps interest rates too high for too long — essentially prioritizing the inflation fight over the job market. That delicate balance has the financial markets, economists and families nationwide eager for the Fed to cut.

“We’re very much aware that we have two-sided risks now,” Powell said. “We’re determined to balance those as best we can.”

At the Fed’s last policy meeting in June, officials penciled in just one interest rate cut this year, down from an estimate of three just a few months before. Economists don’t think officials will be ready to cut rates by the time they convene later in July, shifting attention to this year’s remaining meetings in September, November and December. (The November meeting falls during the week of the election, which could make for particularly fraught timing.)

Brusuelas said policymakers may have ultimately overreacted to discouraging data from the first few months of the year. At the time, the fear was that those reports signaled something entrenched and worrying about inflation. But with a few more months of hindsight, it looks more like typical noise.

“The overreaction took July off the table,” he said.

In the meantime, inflation is proving especially unpopular for households and businesses who don’t think the economy is working for them. Speaking to reporters last month, Atlanta Fed President Raphael Bostic said that when he talks to employers across his district — which includes Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee — they say labor markets are looser than at the start of the year, making it easier to hire. But those same companies are also up against the rising costs of just staying in business.

“To the extent their cost basis is increasing, they’re very uncertain and doubtful they can pass on pretty much any of it,” Bostic said. “Their customers have reached a level of, ‘We’re at our limit, and we can’t do much more than that.’”