In July, the pace of price increases slowed more than anticipated, with the Consumer Price Index (CPI) dropping below 3% for the first time in over three years. This development sets the stage for the Federal Reserve to potentially lower interest rates next month after a prolonged fight against inflation that pushed rates to a 23-year peak. As the economy shows signs of strain and inflation seems to be under control, the Fed may reduce borrowing costs to stimulate job growth.
The CPI rose 2.9% in the 12 months ending in July, a decrease from June’s 3% gain, according to the Bureau of Labor Statistics’ latest report. On a month-to-month basis, prices increased by 0.2%, recovering from a 0.1% decline the previous month. Economists had predicted a 0.2% rise for the month and an annual increase of 3%.
“Breaking the 3% barrier is a key psychological positive,” said Sung Won Sohn, a finance and economics professor. He emphasized that it indicates a downward trend in inflation and a continuation of disinflation.
When excluding volatile categories like food and gas, core CPI rose 0.2% from June and its annual rate decreased to 3.2% from 3.3%, marking the slowest pace since April 2021. The shelter index, which accounts for nearly 90% of the monthly CPI increase, rose by 0.4%.
The S&P 500 saw a 0.4% increase on Wednesday as investors analyzed the inflation report, with the Dow rising by 242 points and the Nasdaq Composite gaining 0.03%.
Economists point out that the housing sector has significantly impacted inflation rates. The methodology for measuring housing-related prices tends to lag behind actual market changes. Although housing costs surged during the pandemic, the recent slowdown in rent hikes could begin to reflect in the data.
The shelter index has increased by 5.1% compared to last year but has steadily decreased from a peak of 8.2% in March 2023. Excluding shelter, the CPI showed a 1.7% increase for the year ending in July.
Energy prices remained stable in July, and food costs continued their modest rise, with grocery prices up 0.1% for the month and restaurant prices up 0.2%. The categories for used cars, medical care, and airline fares also saw declines from June.
This CPI report marks a noticeable cooling in inflation since early this year, contributing to positive sentiment regarding the Fed’s potential interest rate adjustments. The July CPI outcome is being viewed as “unequivocally” positive, indicating manageable price gains.
Given the slow inflation and rising unemployment, the Fed is expected to proceed cautiously with rate cuts. Market forecasts suggest a 56.5% chance of a quarter-point cut and a 43.5% chance of a half-point cut in the upcoming meeting.
Jared Bernstein, chair of the White House Council of Economic Advisers, acknowledged the positive CPI data but emphasized that challenges remain, particularly concerning high costs faced by families.