Consumer Inflation in the United States

Introduction

Consumer inflation in the United States inched up in July following 12 straight months of declines, official data showed Thursday. But excluding volatile food and energy costs, so-called core inflation matched the smallest monthly rise in nearly two years, a sign that the Federal Reserve’s (Fed) interest rate hikes have continued to slow price increases.

Data and Analysis

The data the government reported Thursday showed that overall consumer prices rose 3.2% from a year earlier. That was up from a 3% annual rise in June, which was the lowest rate in more than two years. The latest figure remained far below last year’s peak of 9.1%, though still above the Fed’s 2% inflation target. The Fed, economists and investors, though, pay particular attention to core inflation figures for signs of where price pressures might be headed. From June to July, core inflation remained a tame 0.2%, thanks to easing prices for such items as groceries, used vehicles and electronics. “Core prices are moving in the right direction,” said Rubeela Farooqi, chief U.S. economist for High Frequency Economics. “That will be welcome news to (the Fed’s) policymakers.”

Impact on Interest Rates

Thursday’s price data will be among the key barometers the central bank will weigh in deciding whether to continue raising interest rates. In its drive to tame inflation, the Fed has raised its benchmark rate 11 times since March 2022 to a 22-year high. Overall prices, measured on a month-to-month basis, rose 0.2% in July; roughly 90% of it reflected higher housing costs. Excluding shelter, Paul Ashworth of Capital Economics calculated that core prices actually fell 0.1% from June to July.

Food and Energy Prices

Food prices, which have pressured Americans’ budgets for more than two years, rose a mild 0.2% from June to July. Eggs, meat, beer and dairy products all declined in price, though food is still up 4.9% over the past 12 months. Also falling in July were prices of televisions, audio equipment and pet food. Energy costs rose just 0.1%. Modestly higher gasoline prices were offset by falling electricity prices.

Long-Lasting Goods and Labor Costs

Used-vehicle prices fell for a second straight month, dipping 1.3% from June and 5.6% from a year ago. Those prices had surged last year as a shortage of computer chips disrupted production of new vehicles, forcing more buyers into the used market. The chip shortage has eased, and new-car production has rebounded, thereby reducing demand for used cars and trucks. On a three-month basis, consumer inflation was an annualized 1.9% from May through July, the slowest such pace in three years. Some economists prefer the three-month figure because it captures inflation trends with less volatility than the month-to-month figures.

Economists say that in the Fed’s fight to conquer inflation, the easy progress has likely already been achieved. Gasoline prices, for example, though liable to bounce around from month to month, have already plunged from a peak national average of more than $5 a gallon, which was reached in June of last year after Russia’s invasion of Ukraine. Much of the inflationary surge that began in 2021 was caused by clogged supply chains: Ports, factories and freight yards were overwhelmed by the explosive economic rebound from the pandemic recession of 2020. The result was delays, parts shortages and higher prices. But supply-chain backlogs have eased in the past year, sharply reducing upward pressure on goods prices. Prices of long-lasting manufactured goods actually dipped in June. Now, the Fed faces a daunting problem: Inflationary pressures in service businesses – restaurants, hotels, entertainment venues and the like – where wages represent a substantial share of costs. Worker shortages have led many of these services companies to sharply raise pay.

Conclusion

Despite chronic concerns about higher labor costs, one closely watched measure of wages and salaries – the Labor Department’s employment cost index – grew more slowly from April through June. Excluding government jobs, employee pay rose 1%, less than the 1.2% increase in the first three months of 2023. Compared with a year earlier, wages and salaries grew 4.6%, down from a year-over-year increase of 5.1% in the first quarter. Many Americans continue to feel under pressure from higher prices. Fed officials will have plenty of data to absorb before deciding whether to continue raising rates. Thursday’s report is the first of two CPI numbers the policymakers will see before their next meeting Sept. 19-20. In addition, their favored inflation gauge, called the personal income expenditures price index, comes out on Aug. 31. And the August jobs report will be released Sept. 1. The moderating pace of inflation, combined with a resilient job market, has raised hopes that the Fed may achieve a difficult “soft landing” – raising rates enough to tame inflation without causing a painful recession.