The report from the Commerce Department on Friday also showed consumer spending slowed last month. Signs of easing price pressures and cooling demand could boost the confidence of Fed officials that inflation is moving toward the U.S. central bank's 2% target.

"Inflation continues to moderate and is slowing approaching the Fed's target," said Jeffrey Roach, chief economist at LPL Financial. "At the upcoming meeting, we should expect the Fed to highlight the slowdown in hiring as one reason to cut rates at the September meeting."

The Fed will hold its next policy meeting on July 30-31.

The personal consumption expenditures (PCE) price index nudged up 0.1% last month after being unchanged in May, the Commerce Department's Bureau of Economic Analysis reported. Goods prices dropped 0.2% after falling 0.4% in May.

Prices for motor vehicles and parts declined 0.6%. Furnishings and durable household equipment prices dropped for a third straight month, but the cost of other long-lasting manufactured goods rebounded 1.8%.

Prices for gasoline and other energy goods decreased 3.5% after falling 3.4% in May. Clothing and footwear were cheaper for a second straight month.

But the cost of services increased 0.2%, matching May's gain. There were increases in the costs of housing and utilities, though the pace slowed from prior months. Financial services and insurance costs also rose, but prices for transportation services dropped for a third straight month.

In the 12 months through June, the PCE price index climbed 2.5%. That was the smallest year-on-year gain in four months and followed a 2.6% advance in May.

Excluding the volatile food and energy components, the PCE price index rose 0.2% last month. That followed an unrevised 0.1% gain in May. In the 12 months through June, the so-called core PCE inflation advanced 2.6%, matching May's rise.

Economists polled by Reuters had forecast both monthly headline PCE and core inflation would rise 0.1% in June. Following the release on Thursday of gross domestic product data showing core inflation rising slightly faster than expected in the second quarter, some economists raised their core PCE price index estimate to 0.2%. Forecasts for headline PCE inflation were little changed.

SPENDING SLOWDOWN

Demand in the economy has cooled in response to the Fed's aggressive monetary policy tightening in 2022 and 2023. Economic growth averaged 2.1% in the first half of this year compared to 4.2% in the second half of 2023.

U.S. Treasury yields were trading lower after the release of the inflation data, while the dollar was slightly lower against a basket of currencies.

The U.S. 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.

Subsiding inflation and easing labor market conditions have led financial markets to anticipate three rate cuts this year, starting in September.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3% last month after rising 0.4% in May, the Commerce Department report also showed.

When adjusted for inflation, consumer spending gained 0.2% after climbing 0.4% in May. Spending is likely to remain moderate as income growth has slowed.

Personal income rose 0.2% last month after advancing 0.4% in May. Wages increased 0.3% after surging 0.6% in May. The saving rate slipped to 3.4% from 3.5% in May.

The data was included in the advance second-quarter GDP report, which showed the economy growing at a 2.8% annualized rate, double the first quarter's 1.4% pace.