WASHINGTON: U.S. consumer prices unexpectedly fell and the annual increase was the smallest in a year, reinforcing views that the disinflation trend was back on track and drawing the Federal Reserve another step closer to cutting interest rates.

The consumer price index dipped 0.1% last month after being unchanged in May, the Labor Department's Bureau of Labor Statistics said on Thursday. It was the second straight month of tame CPI readings, and could help to bolster confidence among officials at the U.S. central bank that inflation was cooling.

In the 12 months through June, the CPI climbed 3.0% and followed a 3.3% advance in May. Economists polled by Reuters had forecast the CPI ticking up 0.1% and gaining 3.1% year-on-year.

The annual increase in consumer prices has slowed from a peak of 9.1% in June 2022. The CPI is running far ahead of the measures tracked by the Fed for its 2% inflation target. The Personal Consumption Expenditures (PCE) price indexes both increased 2.6% in May.

The CPI report followed news last week that the unemployment rate rose to a 2-1/2-year high of 4.1% in June from 4.0% in May.

Economic growth has also slowed in response to the central bank's hefty rate hikes in 2022 and 2023, with second-quarter gross domestic product forecast near the 1.8% annualized rate that policymakers view as the non-inflationary growth pace.

Fed Chair Jerome Powell has acknowledged the recent improving trend in price pressures, but told lawmakers this week he was not yet ready to declare inflation had been beaten and that "more good data would strengthen" the case for rate cuts.

A cooling labor market and slowing economy have left financial markets and most economists expecting the Fed to start its easing cycle in September.

The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July. It has hiked its policy rate by 525 basis points since 2022.

Excluding the volatile food and energy components, the CPI gained 0.1% in June after rising 0.2% in May.

In the 12 months through June, the core CPI increased 3.3% after rising 3.4% in May.

 - Reuters