Inflation rate increases slowed more than anticipated in July, marking the first time in over three years that the Consumer Price Index (CPI) has fallen below 3%. This development may lead the Federal Reserve to consider rate cuts next month, following a prolonged effort to combat inflation that had driven rates to a 23-year high. With signs of economic stress evident in the U.S., the Fed could lower borrowing costs to stimulate job growth again now that inflation appears to be under control.
Consumer prices increased by 2.9% for the year ending in July, down from a 3% rise recorded in June, according to the Bureau of Labor Statistics’ latest CPI report released on Wednesday. On a month-to-month basis, prices saw a rise of 0.2%, recovering from a decline of 0.1% the previous month. Economists had predicted a monthly increase of 0.2% and an annual rise of 3%.
“Breaking the 3% barrier is a key psychological positive,” remarked Sung Won Sohn, a finance and economics professor at Loyola Marymount University. He highlighted that this decline indicates not only a downward trend in inflation, but also progress toward disinflation.
When excluding the more volatile categories of gas and food, the core CPI rose by 0.2% from June and its annual rate slowed to 3.2% from 3.3%, marking the most subdued pace of core CPI inflation since April 2021.
Housing costs, which include both owning and renting, increased by 0.4%, contributing to nearly 90% of the monthly price uptick, as noted by the Bureau of Labor Statistics.
The S&P 500 rose by 0.4% on Wednesday in response to the latest inflation report, with the Dow gaining 242 points (0.6%) and the Nasdaq Composite increasing by 0.03%.
Housing prices have significantly impeded the decline of inflation as shelter constitutes more than one-third of the overall CPI. Experts predict that it is only a matter of time before this challenge diminishes. The calculation of housing-related expenses by the BLS is based on lagging data, but recent trends show that the shelter index is beginning to reflect slower or even declining rent increases seen in the market.
Housing costs surged during the pandemic and the ensuing economic recovery due to increased demand for remote work, which strained limited housing inventory. The Fed’s subsequent interest rate hikes intensified the situation, making borrowing expensive for renters, buyers, and builders. “You’re hoping that the effect on demand from rate hikes will outweigh its effect on supply in the short term,” said Brian Bethune, an economics professor at Boston College.
As of July, the shelter index increased by 5.1% year-over-year but has consistently decreased since reaching an 8.2% peak in March 2023. “Looking ahead, it’s quite clear that the inflation outlook will continue to improve,” Sohn predicted.
The CPI, reflecting the average change in prices over time for a specific group of goods and services, has notably cooled since early-year spikes. The positive CPI data from July builds on a strong June report, indicating that inflation is easing, which may prompt the Fed to reconsider its monetary policy.
The overall CPI grew by just 0.155% from June, with core CPI experiencing a similar increase of 0.165%. The Fed has expressed a desire for sustained progress on inflation before adjusting monetary policy, yet recent labor market trends and rising unemployment have altered this perspective.
A disappointing jobs report for July showed only 114,000 jobs were added, alongside a rise in unemployment to 4.3%, triggering recession concerns in the market last week.
As the Fed prepares for its next meeting, there is speculation that it may lower its benchmark interest rate by at least a quarter-point, with some analysts even forecasting a half-point reduction following the weak jobs data. Current probabilities indicate a 56.5% chance of a quarter-point cut and a 43.5% chance of a half-point cut.
In response to the latest CPI statistics, Jared Bernstein, chair of the White House Council of Economic Advisers, acknowledged the positive developments but emphasized that ongoing efforts are necessary as many families continue to face high costs.