Fresh Inflation Data Shows Cooling Prices, Providing Relief to Economists and Policymakers
Fresh inflation data released on Thursday offers economists and policymakers further evidence that price increases are meaningfully cooling. This comes as good news more than a year into the Federal Reserve’s campaign to slow the economy and bring cost increases back under control.
According to the report, the Consumer Price Index (CPI) climbed 3.2 percent in the year through July, marking the first acceleration in 13 months. This follows a 3 percent reading in June. However, it is important to provide context, as inflation was rapid in June of the previous year and slightly slower the following month. This means that when this year’s numbers were measured against 2022 readings, June appeared lower and July appeared higher than if the year-ago figures had been more stable.
Economists are paying particular attention to another figure, the “core” inflation index, which strips out volatile food and fuel prices. The core inflation index increased by 4.7 percent over the past year, slightly down from the 4.8 percent recorded in June. On a monthly basis, core inflation only climbed 0.2 percent, matching the low reading from the previous month.
The report suggests that inflation continues to cool, and the details for July offer positive signs for the future. Rent prices have been moderating, a trend expected to persist in the coming months and help stabilize overall inflation. An index tracking services prices outside of housing is showing slow growth.
Omair Sharif, the founder of Inflation Insights, a research firm, stated, “This is continuing the kind of progress I think that you want to see. Overall, this is pretty good news.”
The report also highlights significant drops in categories such as airfares, hotel costs, and used cars, which have helped limit price increases for now. It remains to be seen if these drops can be sustained in the long-term.
The fresh inflation figures are likely to be closely examined at the Federal Reserve, where officials are considering whether inflation has slowed enough to warrant a halt in interest rate hikes. The benchmark rate has been raised to a range of 5.25 to 5.5 percent, up from near zero in March last year, making it more expensive to borrow for housing or car purchases. As the effects of these rate increases work through the economy, they slow it down and limit how much companies can increase prices.
Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, a research firm, believes there are signs of more disinflation to come, indicating that interest rates may have reached their peak.
Officials are currently debating whether to raise rates again this year to ensure adequate slowing of the economy and a return to normal inflation levels. The fresh inflation figures may make it easier for those who want to hold off on a rate increase to present their case at the Fed’s next meeting on September 20, according to Mr. Sharif.
He stated, “They ‘will have a lot of ammo to skip September, based on what the data are showing us right now.”
Despite the positive news for the Fed, the July inflation report may prove more challenging for the Biden administration to boast about, given the increase in the headline number. Previous reports had shown a fairly across-the-board cooling.
There is also a risk that the overall inflation gauge could remain higher into next month. Gas prices began to rise at the end of July, and although this increase did not significantly impact that month’s report, it has persisted into August and will likely prop up inflation in the next set of figures. These figures will be the last ones released before the Fed’s next decision on interest rates.
Paul Ashworth, the chief North America economist at Capital Economics, believes that, other than triggering a rebound in airline fares through higher jet fuel prices, the knock-on impact of higher fuel costs will be modest. Overall, Ashworth sees “nothing here to suggest the Fed needs to push ahead with further interest rate hikes this year.”