Inflation rates saw a surprising slowdown in July, with the Consumer Price Index (CPI) dropping below 3% for the first time in over three years. This decline positions the Federal Reserve to potentially reduce interest rates next month after a prolonged effort to combat inflation that had driven rates to a 23-year high. With signs of economic stress beginning to surface, the Fed aims to lower borrowing costs to stimulate job growth.
According to the Bureau of Labor Statistics, consumer prices increased by 2.9% over the year ending in July, down from a 3% increase in June. Month-over-month, prices ticked up by 0.2%, following a 0.1% decrease the previous month. Economists had predicted both a 0.2% monthly rise and a 3% yearly increase.
Sung Won Sohn, a professor of finance and economics at Loyola Marymount University, described the drop below 3% as a significant psychological milestone, indicating a downward trend in inflation.
When excluding volatile items like food and gas, the core CPI also rose by 0.2% from June, with the annual rate slowing to 3.2%, the lowest since April 2021. The S&P 500 rose by 0.2% on Wednesday morning in response to the new inflation figures, while the Dow gained 18 points and the Nasdaq Composite increased by 0.4%.
Housing costs, which surged during the pandemic, experienced a 0.4% rise in July and were a primary driver behind the monthly CPI increase, accounting for nearly 90% of it. As housing prices have been a major obstacle in the decline of inflation, economists believe that improvements in the shelter index are imminent, reflecting a stabilization in housing costs.
The shelter index has risen 5.1% year-over-year but has steadily dropped from a peak of 8.2% in March 2023. Analysts believe that the inflation landscape will continue to improve going forward.
While energy prices remained stable in July, food prices saw slight increases, with grocery prices up 0.1% and restaurant prices increasing by 0.2%. On an annual basis, grocery prices rose by 1.1% and restaurant prices by 4.1%. In July, the inflation rates for used cars, medical care, airline tickets, and apparel also declined.
Wednesday’s report, which reflects a notable cooling of inflation since early this year, follows a June report that raised confidence in the moderation of inflation. Bethune from Boston College commented that the July CPI results are “unequivocally a good report,” indicating a positive outlook for future interest rate cuts.
The Federal Reserve has been seeking a consistent trend of declining inflation before making any moves on monetary policy. Recent labor market data, including a weaker-than-expected jobs report for July, has shifted this perspective, intensifying concerns of a potential recession.
With growing expectations for a reduction in interest rates, the probability of a quarter-point cut next month stands at 56.5% according to the CME FedWatch tool, while a half-point cut has a 43.5% probability. The Fed is anticipated to make its decision in light of these economic changes and the upcoming Personal Consumption Expenditures price index report, which is predicted to reflect favorable news for inflation.