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Inflation continued to ease in July, helped by easing pressures on the prices of consumer staples such as food and energy and natural goods such as new and used cars.
THE consumer price indexcore inflation index, increased by 2.9% in July from a year ago, the US Department of Labor was mentioned Wednesday. This percentage is down from 3% in June and the lowest reading from March 2021.
The CPI measures how quickly prices are changing throughout the US economy. It measures everything from fruit and vegetables to haircuts, concert tickets and household appliances.
“I think it’s right below the strike zone,” Mark Zandi, Moody’s chief economist, said of the CPI report.
Perhaps most important to consumers, grocery inflation “continues to rise very slowly,” Zandi said.
Coupled with similar good news for other needs, such as gas and market rents for new renters, “it’s really encouraging news, particularly for lower-income consumers who are being squeezed the most,” he added.
Inflation drives the Fed’s interest rate policy
July’s measure of inflation fell sharply from a pandemic-era peak of 9.1% in mid-2022, which was the highest level since 1981.
It also reaches out to policy makers” long-term target, around 2%.
“We think we’re the worst in terms of inflation,” said Joe Seydl, senior market economist at JP Morgan Private Bank.
The Federal Reserve uses inflation data to help guide its interest rate policy. It raised interest rates to their highest level in 23 years amid the Covid-19 pandemic, pushing up borrowing costs for consumers and businesses in a bid to tame inflation.
Recent labor market data has spooked some investors, who fear it signals a US recession may be on the way. Many economists say these concerns are overblown, at least for now.
But easing inflation combined with a cooler labor market make it likely that Fed officials will begin cutting interest rates at their next policy meeting in September, economists said. This will reduce the cost of borrowing, helping to strengthen the economy.
“In short, this CPI report represents more good data and adds to the evidence supporting a [0.25 percentage point] September rate cut,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a note on Wednesday.
Housing is a barrier
Housing is the one major obstacle to keeping inflation above the Fed’s target right now — on paper, at least, economists said.
Shelter is the largest component of the CPI, and therefore has a large impact on inflation measurements.
The shelter index has risen 5.1 percent since July 2023, accounting for more than 70 percent of the annual increase in the “core” CPI, the BLS said Wednesday. (The core CPI is economists’ preferred gauge of inflation trends. It strips out food and energy costs, which can be volatile.)
After falling to 0.2 percent in June on a monthly basis, shelter inflation jumped to 0.4 percent in July, the BLS said.
Housing inflation moves up and down at glacial speed due to how the government measures it, economists said. Such data quirks mask positive news in the real-time rental market, where inflation has been flat for about two years, Zandi said.
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Excluding the shelter — which is likely justified because of measurement issues — “we’re at the Fed’s target and then some,” Zandi said.
“Mission accomplished, in my view,” he said of fighting inflation.
After stripping the shelter, the CPI rose 1.7% in Julybelow the Fed’s annual target.
Economists generally expect the protective index CPI inflation to continue to decline slowly, given the prevailing trends in market rents.
Other “important” categories
Motor insurance, medical care, personal care and recreation are some other indicators with “significant” increases in the last year, according to the BLS.
Prices in these categories increased by 18.6%, 3.2%, 3.4% and 1.4% respectively.
A spike in new and used car prices a few years ago is likely now fueling high inflation for vehicle insurance and repair, as more expensive cars generally cost more to insure and repair, economists said.
Insurance inflation should eventually fade along with falling car prices, they said. New vehicle prices fell 1% last year, and prices for used cars and trucks fell nearly 11%.
Egg prices — which had risen in 2022 due to a historic bird flu outbreak — are increases again after the fatal disease reappears. They increased by 19% compared to a year ago.
Other food categories, such as bacon and crackers, rose over the past year (up 8.5% and 3%, respectively), but their prices fell in July, suggesting more potential declines ahead.
Headline annual grocery inflation was 1.1% in July, down from an average of 11.4% in 2022which was the highest since 1979.
How supply and demand affected inflation
Inflation for physical goods soared as the US economy reopened in 2021. The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining and entertainment.
It’s a different story now. Goods inflation has largely normalized, while the services sector is a fly in the ointment, economists said.
However, services inflation – generally more sensitive to labor costs – should ease further due to a slack labor market and a slowdown in wage growth, economists said.
High interest rates have also helped reduce overall inflation by dampening demand, Seydl said.
