Inflation Cooled in July, Welcome News for White House and Fed

Inflation dropped significantly in July as gasoline prices and air fares fell, providing a welcome reprieve for consumers and a positive development for economic policymakers in Washington.

of consumer price index It rose 8.5% in the year to July. The pace has been slower than economists expected, and his 9.1% gain in the year to June is significantly smaller. After removing food and fuel costs to better understand potential cost pressures, prices rose 5.9%, in line with previous measurements.

A significant slowdown in overall inflation (with prices barely moving on a month-to-month basis) could boost President Biden at a time when sharp inflation is costing consumers and undermining voter confidence. The new data comes on the heels of last week’s unexpectedly strong jobs data that underscored the economy’s momentum.

The overall slowdown in inflation was attributed to falling prices for gasoline, airfare, used cars and hotel rooms, offsetting increases in key areas such as food and rent. A basic detail of the report is that inflationary pressures are likely to increase, as categories whose prices have fallen can be volatile, and some goods and services whose prices are rising rapidly tend to move more slowly. This suggests that it remains unusually hot under the surface.

Still, as some everyday purchases get cheaper, at least temporarily, and the job market remains strong, Americans may start feeling better about their financial situation.

“This highlights the kind of economy we’ve been building,” Biden said Wednesday. “The labor market for jobs is booming, Americans are working, and there are signs that inflation is easing.”

A slowdown in inflation could also reassure the Federal Reserve, which has been waiting for signs that inflation will begin to ease. The cost of many goods and services continues to rise rapidly, even as falling gasoline and travel-related prices have brought down overall inflation.

“On the surface, this is good news for the Fed,” said Omaia Sharif, founder of Inflation Insights. ”

For more than a year, policy makers hoped that price gains would begin to subside, but hopes have been repeatedly disappointed. Supply chain problems are driving up prices, Russia’s invasion of Ukraine is driving up commodity prices, labor shortages are driving up wages and service prices, and housing shortages are driving up rents.

There have been signs of progress recently in at least two areas, including lower gas prices and improved supply chain tensions. Wednesday’s report also suggested that prices for hotel rooms and plane tickets have started to ease after skyrocketing this summer as people took long-delayed vacations. It’s about how permanent it is.

Prices of various commodities have fallen in recent months, especially gas.Average cost per gallon began to fall Towards $4 in July Overall inflation eased last month after peaking at $5 in June, according to AAA data. The trend continued in August, he said, and should help inflation continue to decline.

But what happens next is unknown. The U.S. Energy Information Administration fuel costs continue But geopolitical instability and the speed of U.S. oil and gas production during the hurricane season could bring refineries to a halt, so it’s a wild card to that outlook.

Similarly, supply chains that were disrupted early in the pandemic have recently shown signs of unraveling, first thanks to a surge in consumer demand for sofas, cars and other goods, and then to the conflict in Ukraine. . The trend should lead to less price pressure on commodities in the coming months, but it’s hard to say how big that impact will be.

An indicator of pressure on global supply chains produced by the Federal Reserve Bank of New York also shows a downward trend in pressure since December. Importers are currently 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 at this point last year, according to Freightos Group data. Average delivery days per month on the route is about 74 days, down from a peak of 99 days in January.

“We are getting rid of massive traffic jams,” said Phil Levy, chief economist at Freight Forwarding Company Flexport.

Some of the initial slowdown in consumer prices may also be related to the Fed’s rapid rate hikes this year. The central bank has been raising interest rates since March and by three-quarters each in the last two meetings, resulting in his Fed’s campaign to curb the economy most rapidly since the 1980s. It’s unusually fast-paced.

used car price declined This may be partly due to rising borrowing costs. Mortgage rates have surged this year and appear to be weighing on the housing market, which may be helping to keep home appliance prices down.

But the Fed’s cooldown is still not the point. Companies such as Amazon and Google’s parent company Alphabet are closely linked to the economic outlook. slow hiringWages are still rising rapidly, and so are the prices of many services. Rents, which account for a large portion of overall inflation and are closely linked to wage growth, continue to rise rapidly.

Rent of main residence 0.7% increase July increased by 6.3% month-on-month. Before the pandemic hit, that number was typically up about 3.5% annually.

These forces could keep inflation undesirably rapid, even if supply chains fray and fuel prices continue to fall. The Federal Reserve is aiming for his 2% inflation over time based on different but related inflation indicators.

“The pressure on COVID-19 reopening and revenge travel has eased and will likely continue to ease,” said Laura Rosner-Warburton, senior U.S. economist at Macropolicy Perspectives. But she also cautioned, saying, “Under the hood, rents are still under pressure. We still have persistent inflation here.”

Inflationary pressures remain, and Fed officials say they won’t be reversing their efforts to bring down inflation anytime soon. Another big rate hike is under consideration at the Sept. 20-21 meeting, but given how much more economic data will be available, officials are unlikely to commit to a move of any particular size. I am paying attention to

Investors interpreted July’s unexpectedly pronounced slowdown in inflation as an indication that policymakers are more likely to raise rates by 0.5 percentage points, rather than a third rate hike of 3/4 percentage points. . Some economists agreed that the new inflation report made a slowdown in rate hikes more likely if the August inflation report released before the Fed’s meeting confirmed a July cooldown.

Aneta Markowska, chief financial economist at Jefferies, said: “The market and the Fed were as good as we could have hoped for from this report.”

But given that inflation has been high for over a year, Fed policymakers would avoid reading too much into one report. Inflation slowed last summer and picked up again through the fall.

Federal Reserve Governor Loretta Mester said: “Commodity inflation and commodity inflation could be lower, but at the same time the service side of the economy could be sustained. This is something we will continue to monitor. Cleveland said during a recent appearance: “It’s not just one month. Oil prices will fall in July, which will be reflected in the July inflation report, but oil prices will fall in the fall.” There are a lot of rising risks.”

Mester said he would “welcome” some types of price slowdown, but said it would be a mistake to “shout victory too soon” and allow inflation to continue without taking necessary action. .

And for many Americans struggling to adjust their lifestyles as the cost of groceries and dry cleaners soars, annual inflation at more than four times its normal rate is a big deal. Even with less gas, it doesn’t seem like a big improvement. Prices and rising wage rates offer some reassurance.

Stephanie Bailey, 54, lives in Waco, Texas with a solid family income. Still, she refrains from eating at her local Tex-Mex restaurant and buying new clothes. This is because of the price increases she sees “everywhere”. At Starbucks she chooses cold drinks other than coffee.

Her son, who is in his 20s and has a degree in Chemistry, until recently worked for a vitamin manufacturer in Houston, is back with his parents. His rent was out of reach on his previous salary, and he now teaches at a local high school.

“It’s very expensive, including housing,” she said. “He was having a hard time making ends meet.”