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Inflation continues retreat In July, price pressure on consumer goods such as food and energy, as well as physical goods such as new and used cars, eased.
this consumer price indexA key inflation gauge rose by 2.9% Compared with the same period last year, the U.S. Department of Labor report Wednesday. The figure was 3% lower than the lowest reading in June since March 2021.
this consumer price index A measure of how quickly prices change in the U.S. economy. It measures everything from fruits and vegetables to haircuts, concert tickets and household appliances.
“I think it’s right below strike territory,” Moody’s chief economist Mark Zandi said of the CPI report.
Perhaps most important for consumers, Zandi said, is that grocery inflation “continues to increase very slowly.”
Combined with similar good news on other necessities such as gasoline and new tenant market rents, “this is really encouraging news, especially for low-income consumers who are most struggling,” he added.
Inflation guides Fed interest rate policy
The July inflation figure was down sharply from the pandemic peak of 9.1% in mid-2022, the highest level since 1981.
It is also close to the goals of policy makers long term goalsabout 2%.
“We think we’re at the worst point yet from an inflation perspective,” said Joe Seidel, senior market economist at J.P. Morgan Private Bank.
The Fed uses inflation data to help guide its interest rate policy. it interest rate hike to a 23-year high amid the Covid-19 pandemic, which has pushed up borrowing costs for consumers and businesses to tame inflation.
Latest labor market data frightened Some investors worry that this is a sign that a U.S. recession may be coming. Many economists expressed these concerns exaggeratedat least for now.
Still, economists say slowing inflation and a cooling labor market make it likely that Fed officials will begin cutting interest rates at their next policy meeting in September. Doing so will Reduce borrowing coststo help boost the economy.
Paul Ashworth, chief North America economist at Capital Economics, wrote in a note on Wednesday: “In short, this CPI report represents more good data and Adding to the evidence supporting a rate cut in September (0.25 percentage point).
Housing is a stumbling block
Economists say the housing market is currently a major obstacle to keeping inflation above the Fed’s target – at least on paper.
Housing is the largest component of the CPI and therefore has a huge impact on inflation data.
The U.S. Bureau of Labor Statistics said on Wednesday that the housing index has risen 5.1% since July 2023, accounting for more than 70% of the annual increase in “core” CPI. (Core CPI is economists’ preferred measure of inflation trends. It strips out food and energy costs, which can fluctuate.)
According to the U.S. Bureau of Labor Statistics, housing inflation rebounded to 0.4% in July after falling to 0.2% on a monthly basis in June.
Housing inflation moves up and down at breakneck speeds because How does the government measureeconomists said. Zandi said the oddity of the data masked positive news for the immediate rental market, which has seen inflation flat in about two years.
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Excluding housing, a category economists say should be taken into account or at least weighed down due to measurement issues, Zandi said, “we’ve met the Fed’s goal and more.” .
“In my opinion, mission accomplished,” he said of fighting inflation.
After excluding housing, CPI Up 1.7% in Julybelow the Fed’s annual target.
Given the general trend in market rents, economists generally expect CPI inflation to continue its slow decline.
Other “noteworthy” categories
The Bureau of Labor Statistics said some other indexes, including motor vehicle insurance, health care, personal care and entertainment, increased “significantly” from last year.
Prices in these categories increased by 18.6%, 3.2%, 3.4% and 1.4% respectively.
Economists say a spike in new and used car prices a few years ago is now likely to fuel high inflation in auto insurance premiums and vehicle repairs, as it often costs more to insure and repair expensive cars.
They say insurance inflation should eventually subside as car prices fall. New car prices have fallen 1% over the past year, and used car and truck prices have dropped nearly 11%.
Egg prices soared in 2022 due to a historic bird flu outbreak. rise again after the deadly disease re-emerged. They grew 19% from a year ago.
Other food categories including bacon and biscuits, which have seen price increases over the past year (up 8.5% and 3% respectively), fell in July, suggesting more falls may be ahead.
Annual grocery inflation in July was 1.1%, lower than Average growth in 2022 is 11.4%the highest level since 1979.
How supply and demand affect inflation
As the U.S. economy reopened in 2021, inflation for physical goods soared.
Things are different now. Economists say goods inflation has largely normalized, while services are a fly in the ointment.
However, economists say services sector inflation – which is typically more sensitive to labor costs – should slow further due to a weakening job market and lower wage growth.
Seidel said higher interest rates also lower overall inflation by reducing demand.
