Inflation remained high but fell from historically high levels in July, raising hopes that unrelenting price increases may have peaked.
According to the Labor Department’s Consumer Price Index, consumer prices rose 8.5% year-on-year, compared with a 9.1% annual increase — a 40-year high — in June. Gasoline prices fell, but groceries and rents continued to rise.
Economists polled by Bloomberg had estimated annual inflation would fall to 8.7%.
On a monthly basis, consumer prices were flat compared to a 1.3% increase in June.
Core prices, which exclude volatile food and energy and generally provide a better gauge of future trends, rose 0.3% in July after rising 0.7% in the previous month. That held the annual gain at 5.9% after three consecutive monthly declines.
Stocks shot higher. The Dow Jones Industrial Average rose 521 points in mid-morning trading and the S&P 500 rose 1.75%. Investors are hoping the better-than-expected report will prompt the Federal Reserve to hike interest rates by half a percentage point next month to fight inflation, rather than a third straight three-quarter-point hike.
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What leads to falling gas prices?
Gas prices, which have been driving inflation, finally plunge on fears a global recession will dampen demand. Pump prices fell 7.7% mom but are still up 44% annually. Unleaded regular priced averaged $4.03 on Tuesday, up from $4.70 a month ago. Further declines are likely, says Goldman Sachs, citing futures markets.
However, food prices have increased by 1.3% since June and by 13.1% over the last 12 months. The recent fall in wheat, corn and other commodity prices amid recession concerns is likely to push food costs lower. But it could be some time before shoppers see it on their grocery bills, says Barclays economist Pooja Sriram.
Meanwhile, she says, Russia’s war in Ukraine is driving up food prices, disrupting fertilizer supplies and driving up the cost of raw materials to farmers.
In July, breakfast cereal prices rose 2% mom and 16.4% yoy. Chicken costs increased by 1.4% and 17.6% annually. And eggs are up 4.3% and 38% year-on-year.
There were some positive signs. Ham prices fell 1%. And beef and veal prices were flat after falling 2.3% in June.
How much have restaurant prices increased?
However, restaurant tabs continued to rise, rising 0.7% and 7.6% annually, and the trend is starting to impact higher-income households. Earlier this year, inflation weighed heavily on Americans earning less than $50,000, says John Leer, chief economist at Morning Consult, a research firm.
As the pandemic has become a less virulent public health threat, Jim Gomes of Palm Desert, Calif., and his wife Jennifer have been eating out about six times a month since the spring. But the bill for dinner at a nice restaurant has increased to about $180 from $120 a year ago, he says.
So the couple cut back by sharing an appetizer and skipping dessert.
“When we get two entrees at $40 each, it gets a little crazy,” says Gomes, 65, a retired finance executive.
Other price trends have been mixed over the past month. Rents rose 0.4% monthly and 6.3% over the past year as landlords offset a rise in home selling prices. Medical care benefits increased annually by 0.4% and 5.1%, respectively. And the cost of new cars increased by 0.6% and 10.4% annually.
But used car prices fell 0.4% and apparel prices fell 0.1%. Summer travelers got more good news as airfares fell for the second straight month, falling 7.8%, although fares are still up 27.7% year-on-year. And hotel prices fell 2.7% after falling 2.8% in the previous month.
How much will the Fed hike interest rates?
Fed Chair Jerome Powell said the central bank must see “clear and compelling evidence” that inflation is falling before it reverses its aggressive rate-hiking strategy.
“This is not yet the meaningful fall in inflation that the Fed is aiming for,” says economist Paul Ashworth of Capital Economics. “But it’s a start and we expect broader signs of easing price pressures over the next few months.”
Ashworth expects the Fed to hike interest rates by half a point next month. However, economist Rubeela Farooqi of High Frequency Economics is forecasting a three-quarter point rise. She points out that the Fed must weigh the latest inflation data against a report from last week that showed the economy added a booming 528,000 jobs as annual wage growth surged to 5.2%, further stoking price pressures.
There are signs of a further decline in inflation. Consumers’ longer-term inflation expectations – which affect actual inflation – fell sharply in July, according to a Federal Reserve Bank of New York survey out this week.
And alongside falling commodity prices, pandemic-triggered supply chain issues are easing and swollen retailers’ inventories are leading to rebates for shoppers.
Barclays now expects headline inflation to end the year at 5.8%, down from the previous estimate of 6.1%. The company forecasts that core price increases will fall to 5.3% by December. Both would still be well above the Fed’s 2% target.
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