Inflation is falling, fast – but it's time to get ready for different sorts of economic pain

• The latest Consumer Price Index report showed inflation cooling to just 3% in June.
• That's good news for both the Federal Reserve and ordinary Americans.
• But there could be other types of economic pain ahead, with the jobs market slowing and some forecasters warning of a recession.

Inflation has started to rapidly cool, but that doesn't mean all is well for the US economy.

Wednesday's Consumer Price Index report showed that the cost of an average shopping basket rose just 3% in June, down from 4% in May, meaning inflation has now fallen for 12 months in a row. 

That's good news for ordinary Americans – who've been grappling with a surge in the cost of living – as well as the Federal Reserve, which has made bringing inflation back down to its target level of 2% its main mission over the past year and a half.

But there could be other types of economic pain ahead.

The Fed raised interest rates from near-zero to over 5% in the space of just 15 months as part of its war against soaring prices, bringing in its fastest hiking cycle in over four decades.

Even with inflation rapidly falling, that tightening cycle probably isn't over yet – with policymakers signaling there'll be at least two more hikes and traders not anticipating any much-needed rate cuts until March 2024, according to CME Group's Fedwatch tool.

Some are hopeful that the Fed will still be able to achieve its dream economic scenario – but the truth is that nobody knows just how much economic damage the central bank's aggressive tightening will cause.

Rising interest rates make it more expensive for both people and companies to borrow money, which usually fuels a decline in both spending and investment that can drag on economic growth.

The US's Gross Domestic Product is expected to fall 0.1% this quarter, according to the Philadelphia Fed – and some of Wall Street's top economists worry there could be a recession, typically defined as two consecutive quarters of negative growth, in either 2023 or 2024.

There are also some signs of weakness in the jobs market, with hiring slowing drastically in June per to the latest Non-Farm Payrolls report.

And while the unemployment rate has remained steadily below 4% despite the Fed's aggressive tightening campaign, that's typically a lagging indicator – meaning it tends to rise after, rather than before, an economic slump.

There are also other factors totally out of the Fed's control that could cause economic pain. 

That includes China's sputtering economy, which could chip away at the earnings of US companies who do business there, and oil prices, which could dramatically rise if Russia and the OPEC+ cartel bring in further production cuts.

In other words, while it's a welcome relief that inflation is falling, the US economy is nowhere near out of the woods just yet.