Prices have increased rapidly since last year, but barely budged in July — a positive development, though not yet enough for a victory lap.
Inflation cooled notably in July as gas prices and airfares fell, a welcome reprieve for consumers and a positive development for economic policymakers in Washington — though not yet a conclusive sign that price increases have turned a corner.
The Consumer Price Index climbed 8.5 percent in the year through July, a slower pace than economists had expected and considerably less than the 9.1 percent increase in the year through June. After food and fuel costs are stripped out to better understand underlying cost pressures, prices climbed 5.9 percent, matching the previous reading.
The marked deceleration in overall inflation — on a monthly basis, prices barely moved — is another sign of economic improvement that could boost President Biden at a time when rapid price increases have been burdening consumers and eroding voter confidence. The new data came on the heels of an unexpectedly strong jobs report last week that underscored the economy’s momentum.
The slowdown in overall inflation stemmed from falling prices for gas, airfares, used cars and hotel rooms, which canceled out increases in critical areas like food and rent. Because the categories in which prices fell can be volatile, and because some of the goods and services that are rapidly increasing in price tend to be slower moving, the report’s underlying details suggest that inflation pressures remain unusually hot below the surface.
+
14
%
Inflation
+
12
+
10
+8.5%
in July
+
8
+5.9%
excluding
food and
energy
+
6
+
4
+
2
0
–
2
’70
’80
’90
’00
’10
’20
+
14
%
+
12
Inflation
+
10
+8.5%
in July
+
8
+
6
+5.9%
excluding
food and
energy
+
4
+
2
0
–
2
1965
’70
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
+
14
%
+
12
Inflation
+
10
+8.5%
in July
+
8
+
6
+5.9%
excluding
food and
energy
+
4
+
2
0
–
2
1965
’70
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
Cereals, bakery products
+2.0
%
Nonalcoholic beverages
+2.0
Electricity
+1.9
Dairy, related products
+1.7
Motor vehicle maintenance
+1.1
Motor vehicle insurance
+0.9
Monthly price
changes in July
Food away from home
+0.7
Rent of primary residence
+0.7
Meats, poultry, fish and eggs
+0.6
New vehicles
+0.6
Medical care commodities
+0.6
Shelter
+0.6
Hospital services
+0.6
Fruits and vegetables
+0.4
All items excl. food, energy
+0.3
Used cars, trucks
+0.3
Alcoholic beverages
+0.3
Tobacco, smoking products
+0.3
Physicians’ services
+0.3
All items
0
–1.1
%
Apparel
–3.9
Utility gas service
–7.7
Gasoline
–9.6
Airline fares
–11.0
Fuel oil
Cereals and bakery products
+2.0
%
Nonalcoholic beverages
+2.0
Electricity
+1.9
Dairy and related products
+1.7
Motor vehicle maintenance and repair
+1.1
Motor vehicle insurance
+0.9
Monthly price
changes in July
Food away from home
+0.7
Rent of primary residence
+0.7
Meats, poultry, fish and eggs
+0.6
New vehicles
+0.6
Medical care commodities
+0.6
Shelter
+0.6
Hospital services
+0.6
Fruits and vegetables
+0.4
All items excluding food and energy
+0.3
Used cars and trucks
+0.3
Alcoholic beverages
+0.3
Tobacco and smoking products
+0.3
Physicians’ services
+0.3
All items
0
–1.1
%
Apparel
–3.9
Piped utility gas service
–7.7
Gasoline (all types)
–9.6
Airline fares
–11.0
Fuel oil
Even so, as some everyday purchases become cheaper, at least temporarily, and the job market stays strong, Americans may begin to feel better about their personal financial situations.
“It underscores the kind of economy we’ve been building,” Mr. Biden said on Wednesday. “We’re seeing a stronger labor market where jobs are booming and Americans are working, and we’re seeing some signs that inflation may be beginning to moderate.”
The slower price increases are also likely to reassure the Federal Reserve, which has been waiting for any sign that inflation is starting to moderate. But central bankers are likely to see this as a first step in the right direction rather than a definitive victory, because the cost of many goods and services continued to pick up rapidly even as gas and travel-related price declines pulled overall inflation lower.
“On the surface, this is good news for the Fed,” said Omair Sharif, founder of Inflation Insights. “This is the first baby step toward the moderation they want to see on a regular basis.”
Fed officials remain committed to wrestling America’s rapid inflation lower, and they have raised interest rates at the quickest pace since the 1980s to try to slow the economy and bring supply and demand into balance — making supersize rate moves of three-quarters of a percentage point at each of their past two meetings. Another big adjustment will be up for debate at their next meeting in September, policymakers have said.
But investors interpreted July’s unexpectedly pronounced inflation slowdown as a sign that policymakers could take a gentler route, raising rates a half-point next month. Stocks soared more than 2 percent on Wednesday, as Wall Street bet that the Fed might become less aggressive, which would decrease the chances that it would plunge the economy into a recession.
“It was as good as the markets and the Fed could have hoped for from this report,” said Aneta Markowska, chief financial economist at Jefferies. “I do think it removes the urgency for the Fed.”
Still, officials who spoke on Wednesday remained cautious about inflation. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, called the report the “first hint” of a move in the right direction, while Charles Evans, president of the Federal Reserve Bank of Chicago, said that it was “positive” but that price increases remained “unacceptably high.”
Policymakers have been hoping for more than a year that price increases will begin to cool, only to have those expectations repeatedly dashed. Supply chain issues have made goods more expensive, Russia’s invasion of Ukraine sent commodity prices soaring, a shortage of workers pushed wages and service prices higher and a dearth of housing has fueled rising rents.
There have been recent signs of progress on at least two of these fronts, with gas prices falling and supply chain strains showing some improvement. Wednesday’s report also suggested that prices on hotel rooms and plane tickets have begun to ease, after surging this summer as people took long-delayed vacations. The question now is how durable the changes will prove.
A range of commodity prices have dropped in recent months, and gas in particular is becoming cheaper. The average cost of a gallon began to fall back toward $4 in July after peaking at $5 in June, based on data from AAA. That decline helped overall inflation to cool last month. The trend has continued into August, which should help inflation to continue to moderate.
But it is unclear what will happen next. The U.S. Energy Information Administration expects that fuel costs will continue to come down, but geopolitical instability and the speed of U.S. oil and gas production during hurricane season, which can take refineries offline, are wild cards in that outlook.
Likewise, supply chains that became roiled early in the pandemic — thanks first to a surge in consumer demand for couches, cars and other goods and later to the conflict in Ukraine — have recently shown signs of untangling. That trend should translate into less pricing pressure on goods in the months to come, but it’s hard to tell how big the effect might be.
An index of global supply chain pressures created by the Federal Reserve Bank of New York also shows that pressures have trended down since December. Importers are now paying about $6,632 on the spot market to move a 40-foot container from China to the West Coast of the United States, compared with $18,346 a year ago, according to data from Freightos Group. Average monthly delivery times on the same route are about 74 days, down from a peak of 99 days in January.
“It’s a massive traffic jam that is now unclogging,” said Phil Levy, the chief economist at Flexport, a freight-logistics company.
Some small part of the nascent slowdown in consumer prices could also tie back to the Fed’s rapid interest rate increases this year. Prices for used cars declined in July, perhaps in part because borrowing costs rose. Mortgage rates have increased this year and appear to be weighing on the housing market, which could be helping to drive down prices for appliances.
But a Fed-induced cooldown is not yet the main story. Job gains remain robust, even as companies including Amazon and Alphabet, Google’s parent company, warily eye the economic outlook and slow hiring. Wages are still rising rapidly, and, as that happens, so are prices on many services. Rents, which make up a chunk of overall inflation and are closely linked to wage growth, continue to climb rapidly — which is concerning, because they tend to change course only slowly.
Rents of primary residences climbed 0.7 percent in July from the prior month, and are up 6.3 percent over the past year. Before the pandemic, that measure typically climbed about 3.5 percent annually.
Those forces could keep inflation undesirably rapid even if supply chains unsnarl and fuel prices continue to fall. The Fed aims for 2 percent inflation over time, based on a different but related inflation measure.
“The Covid reopening and revenge travel pressures have eased — and are probably going to continue easing,” said Laura Rosner-Warburton, senior U.S. economist at MacroPolicy Perspectives. But she also struck a note of caution, adding: “Under the hood, we’re still seeing pressures in rent. There’s still sticky inflation here.”
And given how high inflation has been for more than a year now, Fed policymakers will avoid reading too much into a single report. Inflation slowed last summer only to speed up again in fall.
“We might see goods inflation and commodity inflation come down, but at the same time see the services side of the economy stay up — and that’s what we’ve got to keep watching for,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said during a recent appearance. “It can’t just be a one month. Oil prices went down in July; that’ll feed through to the July inflation report, but there’s a lot of risk that oil prices will go up in the fall.”
Ms. Mester said that she “welcomes” a slowdown in some types of prices, but that it would be a mistake to “cry victory too early” and allow inflation to continue without taking necessary action.
For many Americans who are struggling to adjust their lifestyles to rapidly climbing costs at the grocery store and dry cleaners, an annual inflation rate that is still more than four times its normal speed is unlikely to feel like a big improvement, even as lower gas prices and rising pay rates do offer some relief.
Stephanie Bailey, 54, has a solid family income in Waco, Texas. Even so, she has been cutting back on meals at local Tex-Mex restaurants and new clothes because of the climbing prices, which she sees “everywhere.” At Starbucks, she opts for cold, noncoffee drinks, which in some cases are cheaper.
Her son, who is in his 20s, has moved back in with his parents. Rent had become out of reach on his salary working at a vitamin manufacturer. He is now teaching at a local high school.
“It’s just so expensive, with housing,” Ms. Bailey said. “He was having a hard time making ends meet.”
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