The Consumer Price Index (CPI) saw a 0.2% increase in July, aligning with expectations. Year-over-year, the CPI rose by 2.9%, marking the lowest annual growth rate since March 2021 and slightly under the anticipated 3%. Core CPI, which excludes the fluctuating prices of food and energy, also rose by 0.2% in July and showed a year-over-year increase of 3.2%, the lowest rate since April 2021.
In a recent address by CEA Chair Jared Bernstein, he highlighted that inflation is currently undergoing a transformation. Initially, inflation surged as consumer demand rapidly shifted from in-person services to goods amid pandemic-related disruptions in supply chains. Research from Federal Reserve economists indicates that inflation accelerated simultaneously across advanced economies. As supply chains improved and demand began to ease, a trend of disinflation took effect, gradually steering inflation back toward pre-pandemic levels.
Although the transition is ongoing and further efforts are needed, recent data indicates a consistent downward trend in inflation that persisted through July. A recent analysis of core CPI trends over 12-month and 3-month periods reflects this easing inflation, despite fluctuations earlier in the year when the disinflation process stalled temporarily.
The analysis emphasizes the main components of inflation over the last three months, including housing, energy, food, core services, and core goods.
Regarding core goods, pandemic influences are evident as goods inflation significantly contributed to CPI increases in 2021 but has negatively impacted inflation since July 2023, with core goods prices down by 0.9% this year.
Food inflation for July was recorded at 0.2%, showing significant easing from previous highs, particularly in grocery prices which rose only 0.1% in July and 1.1% over the past year. This marks a positive trend as grocery inflation has remained beneath headline CPI since March 2023.
In contrast, restaurant prices continue to rise, up 4.1% annually, though this is substantially lower than the 8.8% increase noted in March of the previous year.
Energy prices, notably retail gas, have also become a source of disinflation. Over the past year, gas prices incorporated in the CPI declined by 2.2%. Data from AAA reveals that from an average of $3.85 per gallon a year ago, gas prices have fallen to $3.44, equaling a $0.41 reduction per gallon. At the same time, average hourly wages for middle-wage workers increased from $29.03 to $30.14, indicating that workers can now purchase more gas for the same amount of labor.
Housing prices have had a somewhat lesser effect on inflation’s round-trip compared to other categories. In February 2023, housing contributed 2.8 percentage points to the three-month CPI inflation; however, this contribution has since diminished, dropping by a full percentage point by December 2023. After a brief increase early this year, housing’s influence on headline inflation has decreased steadily from April to July.
The ongoing decline in inflation is indeed a positive development, though its impact on household budgets may not always be clear. For example, when examining grocery prices alongside rising wages, it reveals that middle-wage workers now spend the same amount of time working to buy groceries as they did before the pandemic and rising inflation.
Overall, the past 15 months have seen hourly wage growth surpass price growth, a trend that extends to 17 months among middle-wage earners.
These positive indicators suggest the need for continued efforts as many families still grapple with high prices. The agenda to reduce costs related to healthcare, prescription drugs, housing, childcare, and other budgetary pressures remains a priority. The combination of decreasing inflation and increasing wages continues to enhance families’ purchasing power, and efforts to build on this progress will persist.