US inflation slowed more than expected in July, reflecting lower energy prices, which may ease pressure on the Federal Reserve to continue raising interest rates aggressively.
The consumer price index rose 8.5 percent from a year earlier, cooling from June’s 9.1 percent advance that was the biggest in four decades, they showed on Wednesday the data of the Department of Labor. Prices did not change compared to the previous month. A drop in gasoline offsets the rise in food and housing costs.
The so-called core CPI, which strips out the more volatile components of food and energy, rose 0.3% from June and 5.9% from a year ago. Basic and general measures were below forecasts.
The data may give the Fed some leeway, and cooling gas prices, as well as used car prices, offer some respite for consumers. But annual inflation remains high at more than 8 percent and food costs continue to rise, providing little relief for President Joe Biden and Democrats ahead of the midterm elections.
COST OF LIVING
While falling gas prices are good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings. After last week’s data showed still solid job demand and firmer wage growth, a further slowdown in inflation could take away some of the Fed’s urgency to extend interest rate hikes.
Treasury yields slid down the curve as the S&P 500 rose and the dollar sank. Traders now see a rate hike of 50 basis points next month as more likely, up from 75.
“This is a necessary impression for the Fed, but it’s not enough,” Michael Pond, head of inflation market strategy at Barclays Plc, told Bloomberg TV. “We need to see a lot more.”
Fed officials have said they want to see months of evidence that prices are cooling, particularly in the central gauge. They will have another round of monthly CPI and jobs reports before their next policy meeting on September 20-21.
Gasoline prices fell 7.7% in July, the most since April 2020, after rising 11.2% a month earlier. The prices of public services fell by 3.6% compared to June, the most since May 2009.
Food costs, however, rose 10.9% from a year ago, the most since 1979. Used car prices fell.
What Bloomberg Economics Says…
“With rents still pushing higher and higher wages starting to filter through to services inflation, we expect this pause to be short-lived. Core CPI could move closer to 7% in the coming months, despite our goods price moderation hypothesis”.
–Anna Wong and Andrew Husby, economists
Housing costs, which are the largest component of services and account for about a third of the overall CPI index, rose 0.5% from June and 5.7% from the year past, the highest since 1991. This reflects a 0.7% increase in primary residence rent. Hotels, meanwhile, fell by 3.2%.
In the rest of leisure, air fares fell 7.8% from the previous month, the most in almost a year.
Although prices show signs of moderation, there are several factors that keep inflation high. Housing costs are important, as are unexpected supply shocks. And wages continue to rise at a historically fast pace, worrying some economists about the so-called wage-price spiral.
However, these gains do not keep up with inflation. A separate report showed that real average hourly earnings fell 3% in July from a year earlier, declining every month since April 2021.
“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 starting to moderate,” Biden said after the report. He warned that “we could face additional headwinds in the coming months,” citing the war in Europe, supply chain delays and pandemic-related disruptions in Asia.
The impact of inflation on wages has begun to reduce spending, with a slowdown in the pace of personal consumption growth between the first and second quarters.
That said, consumer expectations for US inflation fell sharply in the latest survey from the New York Fed, suggesting that Americans have some confidence that prices will come off the boil in the next one or five years.