Falling prices for gas, airline tickets and clothes helped give Americans a slight break from the pain of high inflation last month, though overall price increases slowed only modestly from a four-decade high in June.
Consumer prices jumped 8.5% in July compared with a year earlier, the government said Wednesday, down from a 9.1% year-over-year increase in June. On a monthly basis, prices were unchanged from June to July, the smallest such rise in more than two years.
Much of the relief last month was felt by travellers: hotel room costs fell 2.7% from June to July, airfares nearly 8% and rental car prices a whopping 9.5%. Those price declines followed steep increases in the past year after Covid-19 cases eased and travel rebounded. Airfares are still nearly 30% higher than they were a year ago.
Last month’s declines in travel-related prices helped lower so-called core inflation, a measure that excludes the volatile food and energy categories to provide a clearer picture of underlying inflation. Core prices rose just 0.3% from June, the smallest month-to-month increase since March. And compared with a year ago, core inflation amounted to 5.9% in July, the same year-over-year increase as in June.
Still, core prices have slowed in the recent past only to re-accelerate in subsequent months. And even if inflation continues to weaken, it is a long way from the Fed’s 2% annual target.
“There’s good reason to think inflation will continue to slow,” said Michael Pugliese, an economist at Wells Fargo. “What I think gets lost in that discussion is, slow by how much?”
Even if consumer inflation were to slow to 4% — less than half its current level — Pugliese suggested that it would still likely cause the Fed to keep raising rates.
Wednesday’s report increased hope that the modest slowdown in inflation might enable the Fed to slow the pace of its increases in short-term rates when it meets in late September — and sent stock prices jumping. How quickly and how far the Fed raises borrowing costs has significant effects on the economy: sharper hikes tend to reduce consumer and business borrowing and spending and make a recession more likely.
If the Fed doesn’t have to raise rates as high to restrain prices, it has a better chance of engineering an elusive “soft landing,” whereby growth slows enough to curb high inflation but not so much as to cause a recession.
Biden seized on the report in remarks he made Wednesday, highlighting the flat monthly inflation figure:
“I just want to say a number: Zero,” he told reporters. “Today, we received news that our economy had zero percent inflation in the month of July.”
Biden has pointed to declining gas prices as a sign that his policies — including large releases of oil from the nation’s strategic reserve — are helping lessen the higher costs that have hurt household finances, particularly for lower-income Americans and Black and Hispanic households.
Yet Republicans are stressing the persistence of high inflation as a top issue in the midterm congressional elections, with polls showing that elevated prices have driven Biden’s approval ratings down sharply.
There are other signs that inflation may fade in coming months. Americans’ expectations for future inflation have fallen, according to a survey by the Federal Reserve Bank of New York, likely reflecting the drop in gas prices that is highly visible to most consumers.
Inflation expectations can be self-fulfilling: If people believe inflation will stay high or worsen, they’re likely to take steps — such as demanding higher pay — that can send prices higher in a self-perpetuating cycle. Companies then often raise prices to offset higher their higher labor costs. But the New York Fed survey found that Americans’ foresee lower inflation one, three and five years from now than they did a month ago.
Supply chain snarls are also loosening, with fewer ships moored off Southern California ports and shipping costs declining. Prices for commodities like corn, wheat and copper have fallen steeply.
Yet in categories where price changes are stickier, such as rents, costs are still surging. One-third of Americans rent their homes, and higher rental costs are leaving many of them with less money to spend on other items.