U.S. inflation slowed in July by more than expected, reflecting lower energy prices, which could ease pressure on the Federal Reserve to continue aggressively raising interest rates.
The consumer price index rose 8.5 percent from a year earlier, cooling from a 9.1 percent gain in June that was the biggest in four decades, Labor Department data showed on Wednesday. Prices are unchanged compared to the previous month. The decline in gasoline compensation increases the cost of food and shelter.
The so-called core CPI, which strips out the more volatile food and energy components, rose 0.3 percent from June and 5.9 percent from a year ago. Core and general measures were below predictions.
The data may give the Fed some breathing room, and lower gasoline and used-car prices offer respite to 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 LIFE
While the drop in gas prices is good news for Americans, the cost of living is still painfully high, forcing many to pile up credit cards and drain savings. After last week’s data showed still-solid labor demand and steadier wage growth, a further slowdown in inflation could take away some of the Fed’s urgency to extend excessive rate hikes.
Treasury yields slipped across the curve while the S&P 500 was higher and the dollar fell. Traders now see a rate hike of 50 basis points next month as more likely, instead of 75.
“This is a necessary print for the Fed, but not enough,” Michael Pond, head of inflation market strategy at Barclays Plc, said on 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 core 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. Utility prices fell 3.6% from June, the most since May 2009.
However, food spending rose 10.9% from the previous year, the most since 1979. Used car prices fell.
What Bloomberg Economics Says…
“With rents still pushing higher and high wages starting to seep into services inflation, we expect this pause to be short-lived. The core consumer price index could reach 7 percent in the coming months – despite our assumption of moderation in commodity prices.
–Anna Wong and Andrew Husby, economists
Shelter spending – which is the largest component of services and makes up about a third of the overall CPI – rose 0.5% from June and 5.7% from last year, the most since 1991 . This reflects a 0.7% jump in primary residence rents. Meanwhile, hotels fell in price by 3.2 percent.
Elsewhere in leisure, airfares fell 7.8% from the previous month, the most in nearly a year.
Although prices are showing signs of slowing, there are several factors that risk inflation remaining high. Housing costs are high, as are unexpected supply shocks. And wages are still rising at historically fast rates, worrying some economists about the so-called wage-price spiral.
However, these earnings have not kept pace with inflation. A separate report showed real average hourly earnings fell 3% in July from a year earlier, falling 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 slow,” Biden said after the report. He warned that “we may 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 began to dampen spending, with the growth rate of personal consumption slowing between the first and second quarters.
Still, U.S. consumer inflation expectations fell sharply in the latest New York Federal Reserve survey, suggesting Americans have some confidence that prices will ease over the next one to five years.
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