Inflation in the United States edged up in July after declining for 12 straight months. However, excluding volatile food and energy costs, so-called core inflation hit the smallest monthly rise in almost two years, a sign that Federal Reserve rate hikes continue to slow price rises.
Inflation figures reported by the government on Thursday showed overall consumer prices rose 3.2% year-on-year. That was up from a 3% annual increase in June, the lowest in more than two years. The latest reading stayed well below last year’s peak of 9.1%, but was still above the Federal Reserve’s inflation target of 2%.
However, the Fed, economists and investors pay close attention to core inflation numbers for signs of where inflationary pressures may be headed. From June to July, core inflation stayed at a low 0.2%.
“Core prices are moving in the right direction,” said Rubeela Farooqi, chief economist for high-frequency economics in the US. “That would be welcome news for Fed policymakers.”
Thursday’s price data will be among the most important barometers the Fed will consider when deciding whether to hike further. In a bid to curb inflation, the Fed has raised interest rates 11 times since March 2022 to a 22-year high.
Overall prices, measured on a monthly basis, rose 0.2% in July, and 90% of this reflected higher housing costs. Excluding housing, Capital Economics’ Paul Ashworth calculated that core prices actually fell 0.1% from June to July.
Food prices, which have been weighing on American budgets for months, rose slightly by 0.2% from June to July. In the last 12 months, the price of groceries is still up 4.9%.
Used car prices fell for the second straight month, down 1.3% from June. They remain on average 5.6% more expensive than a year ago.
Economists say the simple steps forward in the Fed’s fight against inflation have likely already been made. Gasoline prices, for example, while fluctuating month-to-month, have already fallen from a nationwide high of more than $5 a gallon, reached in June last year after Russia invaded Ukraine.
Much of the inflationary spurt that began in 2021 was caused by congested supply chains: ports, factories and rail yards were overwhelmed by the explosive economic recovery from the 2020 pandemic recession. The consequences were delays, shortages of parts and higher prices. However, backlogs in the supply chain have narrowed over the past year, which has significantly eased the upward pressure on commodity prices. Durable goods prices actually fell in June.
Now the Fed faces a formidable problem: sustained inflationary pressures in service industries — restaurants, hotels, entertainment venues, and the like — where wages are a significant component of costs. Labor shortages have caused many of these service companies to raise wages drastically.
Last week, for example, the Labor Department reported that average hourly wages rose 4.4% year-on-year in July, more than expected. To cover their higher labor costs, companies have typically increased their prices, fueling inflation.
Another factor counteracting a sustained fall in year-on-year inflation rates is that prices rose sharply in the first half of last year before slowing in the second half. Therefore, any price increase in July would cause the inflation rate to rise year-on-year.
Nevertheless, economists warn against reading too much into a month’s figures. Many of them assume that inflation will continue to fall.
Despite chronic concerns about higher labor costs, a closely watched measure of wages and salaries — the Labor Department’s Labor Cost Index — grew more slowly from April to June. Excluding government jobs, workers’ salaries rose 1%, less than the 1.2% increase in the first three months of 2023. Year-on-year, wages and salaries rose 4.6%, compared with a year-on-year increase of 5.1% in the first quarter.
Fed officials have a lot of data to process before deciding whether to hike rates further. Thursday’s report is the first of two CPI numbers policymakers will see ahead of their next meeting in September. 19-20 In addition, their favorite indicator of inflation, called the Personal Income Expenditure Price Index, comes out on August 31st. And the job report for August will be published in September. 1.
Many economists and market analysts expect the Fed’s latest rate hike in July to be their last: according to CME Group’s FedWatch tool, more than 90% of traders now expect no Fed rate hike next month.
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