The most recent data shows that inflation is on a downslope: the status quo avoids recession, but it’s still precarious.

WASHINGTON, July 12 (Reuters) - U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation subsided further, but probably not fast enough to dissuade the Federal Reserve from resuming raising interest rates this month.

The report from the Labor Department on Wednesday also showed underlying consumer prices posting their smallest monthly gain since August 2021. The considerable slowdown in underlying inflation sparked a rally on the stock and bond markets, with investors convinced the U.S. central bank's fastest monetary policy tightening cycle since the 1980s was drawing to a close.

"Inflation isn't dead, but the extraordinary pandemic push on prices from shortages and shift to stay-at-home purchases is clearly over, and the Fed for the first time has the upper hand in its inflation fight," said Christopher Rupkey, chief economist at FWDBONDS in New York.

The CPI gained 0.2% last month after edging up 0.1% in May. Shelter, which includes rents, accounted for 70% of the rise in the CPI last month. There were also increases in motor vehicle insurance as well as gasoline prices, which rose 1.0%. These gains offset a decrease in the prices of used cars and trucks.

Food prices ticked up just 0.1%. Grocery food prices were unchanged amid further declines in the cost of eggs as well as cheaper meat and fish, which offset a 0.8% increase in fruits and vegetables. But it still cost more to eat out.

In the 12 months through June, the CPI advanced 3.0%. That was the smallest year-on-year increase since March 2021 and followed a 4.0% rise in May.

Economists polled by Reuters had forecast the CPI rising 0.3% last month and climbing 3.1% year-on-year.

Annual inflation is a third of what it was last June, when prices surged 9.1%, which was biggest increase since November 1981 and marked a peak in the year-on-year CPI rate.

The year-on-year CPI is slowing in part as last year's large rises drop out of the calculation.

Cooling inflation also meant increased purchasing power for consumers. Inflation-adjusted weekly earnings for private workers rebounded 0.5% and were up 0.6% on a year-on-year basis.

President Joe Biden said the inflation and wages data were evidence that his economic policy, dubbed by economists as "Bidenomics" was delivering results and vowed to "continue to fight for lower costs for families every day."

Nevertheless, inflation remains well above the Fed's 2% target, with the labor market still tight. Though employment gains were the smallest in 2-1/2 years in June, the unemployment rate fell close to historically low levels and wage growth was strong. Still, retreating inflation raised cautious optimism that the economy could avoid a much-anticipated recession.

It also bolstered the argument against further rate hikes. The U.S. central bank has signaled two rate hikes this year, including the one expected this month.