Inflation rate drops; prices still likely to remain high
Consumer index price falls to 8.5% from last year; experts say underlying factors show pressures are staying strong
Inflation cooled notably in July as gas prices and airfares fell, a welcome reprieve for consumers and a positive development for economic policymakers in Washington — though not yet a conclusive sign that price increases have turned a corner.
The consumer price index climbed 8.5 percent in the year through July, a slower pace than economists had expected and considerably less than the 9.1 percent increase in the year through June. After food and fuel costs are stripped out to better understand underlying cost pressures, prices climbed 5.9 percent, matching the previous reading.
The marked deceleration in overall inflation — on a monthly basis, prices barely moved — is another sign of economic improvement that could boost President Joe Biden at a time when rapid price increases have been burdening consumers and eroding voter confidence. The data came on the heels of an unexpectedly strong jobs report last week that underscored the economy’s momentum.
The slowdown in overall inflation stemmed from falling prices for gas, airfares, used cars and hotel rooms, which canceled out increases in critical areas like food and rent. Because the categories in which prices fell can be volatile, and because some of the goods and services that are rapidly increasing in price tend to be slower moving, the report’s underlying details suggest inflation pressures remain unusually hot below the surface.
Even so, as some everyday purchases become cheaper, at least temporarily, and the job market stays strong, Americans may begin to feel better about their personal financial situations.
“It underscores the kind of economy we’ve been building,” Biden said Wednesday. “We’re seeing a stronger labor market where jobs are booming and Americans are working, and we’re seeing some signs that inflation may be beginning to moderate.”
The slower price increases are also likely to reassure the Federal Reserve, which has been waiting for any sign that inflation is starting to stabilize. But central bankers are likely to see this as a first step in the right direction rather than a definitive victory because the cost of many goods and services continued to pick up rapidly even as gas and travel-related declines pulled overall inflation lower.
Fed officials remain committed to wrestling America’s rapid inflation lower, and they have raised interest rates at the quickest pace since the 1980s to try to slow the economy and bring supply and demand into balance. Another big adjustment will be up for debate at their next meeting in September, policymakers have said.
But investors interpreted July’s unexpectedly pronounced inflation slowdown as a sign that policymakers could take a gentler route, raising rates a half-point next month. Stocks soared by more than 2 percent on Wednesday, as Wall Street bet the Fed might become less aggressive, which would decrease the chances that it would plunge the economy into a recession.
“It was as good as the markets and the Fed could have hoped for from this report,” said Aneta Markowska, chief financial economist at Jefferies. “I do think it removes the urgency for the Fed.”