Price increases have decelerated more than anticipated in July, marking the first time in over three years that the Consumer Price Index (CPI) has fallen below 3%. This trend opens the door for the Federal Reserve to consider lowering interest rates next month following an extensive battle against inflation that had driven rates to a 23-year peak. Signs of economic strain in the U.S. are emerging, and with inflation appearing to be under control, the Fed may reduce borrowing costs to stimulate job growth.
According to the Bureau of Labor Statistics, consumer prices rose by 2.9% for the year ending in July, down from a 3% annual increase in June. Month-over-month, prices edged up by 0.2% after a slight decrease of 0.1% in the prior month. Economists had predicted a monthly increase of 0.2% and an annual rise of 3%.
Sung Won Sohn, a finance and economics professor at Loyola Marymount University, described crossing the 3% threshold as a significant psychological milestone. He noted that it indicates a downward trend in inflation and a trajectory toward disinflation.
When excluding the often volatile categories of gas and food, the core CPI saw a 0.2% increase from June, with the annual rate easing to 3.2% from 3.3%. This marks the slowest pace of core CPI inflation since April 2021. The cost of housing, including owning and renting, rose 0.4%, contributing nearly 90% of the overall monthly increase.
The S&P 500 gained 0.4% on Wednesday as investors analyzed the latest inflation data. The Dow Jones Industrial Average climbed 242 points, or 0.6%, while the Nasdaq Composite increased by 0.03%.
Housing costs, which constitute more than a third of the total CPI, have been a significant barrier to reducing inflation. However, economists believe it is soon to ease since the BLS’s method of assessing housing prices typically reflects past trends. Recently, the shelter index has begun to correlate more closely with the stagnant or declining rent increases being observed.
During the pandemic and subsequent economic recovery, housing prices surged due to increased demand for remote work amid low inventory. The Federal Reserve’s aggressive interest rate hikes further complicated matters by raising borrowing costs for renters, buyers, and builders.
On an annual basis, the shelter index rose 5.1% through July, although this figure has gradually fallen from its peak of 8.2% in March 2023.
When excluding shelter, the CPI increased by 1.7% for the 12 months leading up to July. Energy prices remained steady, particularly gasoline, while food prices saw modest increases in grocery and restaurant costs, rising 0.1% and 0.2%, respectively, for the month.
The July CPI report reflects the broader trend of cooling inflation, as prices for numerous goods have either risen slowly or declined. Following the release of the report, some experts characterized it as a favorable indication of future economic conditions, which could lead the Fed to loosen monetary policy.
The central bank had been looking for consistent progress in curbing inflation before adjusting interest rates; however, the recent slowdown in the labor market and an unexpected rise in unemployment have influenced this perspective.
In light of this data, there is an expectation that the Fed will cut its benchmark interest rate by at least a quarter-point during next month’s meeting, with some speculation for a possible half-point reduction. As of now, the likelihood of a quarter-point cut stands at 56.5%, with a 43.5% chance of a half-point cut.
Jared Bernstein, chair of the White House Council of Economic Advisers, acknowledged the latest CPI figures while emphasizing that there remains work to be done, as many families continue to face high costs.