The Labor Department said Wednesday that the consumer price index rose 2.9% for the 12 months ended in July, an annualized increase that suggests 2022’s historic inflation surge continues to ease.
Annual inflation had not fallen below 3% since March 2021. After a brief rise in the spring, inflation has fallen modestly this summer.
On a monthly basis, prices increased by 0.2%. Food prices increased 2.2% year-on-year. Energy prices increased 1.1% while gasoline prices fell. By far the biggest increases were in the prices of transport services (8.8%) and housing (5.1%).
The Labor Department reported that rising home prices “accounted for nearly 90 percent of the month-on-month increase” in overall inflation. Transportation costs and home prices lifted “core” inflation, a closely watched measure that excludes volatile food and energy items, which rose 3.2 percent from a year earlier.
Stocks were mixed on the inflation news. The Dow Jones Industrial Average was up about 0.2% in morning trading. The S&P 500 was down 0.15%. The Nasdaq Composite Index was down 0.6%.
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The Federal Reserve set an inflation target of 2%, based on a more esoteric economic indicator called personal consumption expenditures. That target has not been met yet, but the numbers seem to be heading in the right direction.
“The July CPI reading appears to signal that the Fed wants to make further progress toward achieving its 2 percent inflation goal,” Mark Hamrick, senior economic analyst at Bankrate, said in a statement.
Ryan Sweet, chief US economist at Oxford Economics, wrote that rising rent and hotel costs “remain a thorn in the Fed’s side” in its fight against inflation.
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When will the Federal Reserve cut interest rates?
With inflation already easing, the Federal Reserve has signaled it may cut interest rates as early as mid-September, a move that is eagerly anticipated in the investment community.
The Federal Reserve’s policy interest rate has remained at a 23-year high of above 5% since July 2023 as it waits for inflation to subside.
That has meant consumers have endured the double whammy of high inflation and high interest rates in recent months, making homes, cars and other consumer goods less affordable.
The Fed is facing increasing pressure to cut interest rates, with some blaming it for the recent stock market turmoil, and the first cuts are widely expected to come in September.
“We still expect the Fed to cut rates by up to half a percentage point at its Sept. 17-18 meeting,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, wrote in a note before the inflation release.
“The September rate cut, followed by two quarter-point cuts at the Fed’s November and December meetings, is expected to help the economy shift from slowing growth to a gradual acceleration that would continue through 2025,” he wrote.
Inflation has retreated from a 40-year high
A series of rate cuts would signal the Fed is broadly satisfied that inflation is under control.
Inflation hit a 40-year high of 9.1% in the summer of 2022. It has since fallen slowly, hovering between 3% and 4% annually in recent months.
Prices fell in June, bringing annual inflation to 3%, the third consecutive month of declines and the slowest increase in a year.
Most forecasters projected annual inflation would remain around 3% in July. Gasoline prices are lower than they were a month or a year ago as retailers continue to cut prices. New car prices have remained stable.
Meanwhile, wages have been growing faster than the inflation rate, tending to increase household purchasing power.
The easing of inflation has yet to be felt by consumers
The easing of inflation has yet to fully trickle down to consumers, with economists saying Americans are still seeing cumulative increases in the prices of basic goods like food and gasoline over time.
more:Inflation is easing, but Americans aren’t feeling it yet
Think about it: a basket of consumer goods that cost $100 at the beginning of 2020 will cost $121.79 in June 2024, according to the federal inflation calculator.
Consumers are voting with their feet by rebelling against price increases, opting for cheaper private label brands, “downgrading” from sit-down restaurants to fast food, and even rebelling against higher fast food prices. Fast food chains are responding by bringing back value menus.
