U.S. Inflation Runs Cooler Than Forecast

Inflation in the United States declined more than anticipated during July, which is likely due to lower oil prices. This may put some pressure on Federal Reserve officials to keep increasing interest rates aggressively.

According to Labor Department data, the consumer price index rose 8.5% in comparison with a year ago, which is a cooling effect from the 9.1% June increase, Wednesday’s Labor Department data revealed. The prices were the same as last month. An increase in fuel prices was offset by an improvement in food- and shelter cost.

The so-called core CPI was 0.3% higher than June, and 5.9% more than a year ago. Both core and overall measures came in lower than expected.

These data could give the Fed some breathing space, while the cooling of gas prices and used car prices may offer relief to consumers. The Democrats and President Joe Biden are not likely to see any relief from the rising food prices and annual inflation of more than 8.8%.

Cost of Living

Although a decrease in gasoline prices has been good news, Americans still face high living costs. Many are forced to use credit cards and draw down savings. A further decline in inflation, which was confirmed by data from last week’s survey, could make it less urgent for the Fed to increase interest rates.

Treasury yields slid across the curve while the S&P 500 was higher and the dollar plunged. The traders now believe that a rate rise of 50basis points next month is more likely than 75.

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“This is a necessary print for the Fed, but it’s not sufficient,” Michael Pond, head of inflation market strategy at Barclays Plc said on Bloomberg TV. “We need to see a lot more.”

Fed officials said that they are looking for evidence of a cooling economy, particularly in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

The July 7.7% drop in gasoline prices was the largest since April 2020. They had risen 11.2% one month prior. The most dramatic drop in utility prices since May 2009 was 3.6%, which is the same as June.

The highest rise in food prices since 1979 was 10.9%, but that is still a decrease from one year ago. The prices of used cars decreased.

Shelter costs—which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.5% from June and 5.7% from last year, the most since 1991. The 0.7% rise in primary rent reflects this. In contrast, hotels fell by 3.2%.

Other leisure markets saw airfares drop 7.8% from their previous month. It was the biggest decline in almost one year.

Although prices may be showing some signs of easing, several factors could keep inflation high. Unexpected supply shocks and housing costs are big factors. There is a wage-price spiral, which economists consider a historical rise in wages.

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However, those gains aren’t keeping up with inflation. Separate data showed that real hourly earnings dropped 3% from one year ago to July, and has fallen every month since April 2021.

“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,” Biden said after the report. He cautioned, “we could face additional headwinds in the months ahead,” citing the war in Europe, supply-chain delays and pandemic-related disruptions in Asia.

With the rate of personal consumption growth slowing in the first quarter and the second quarters due to inflation’s impact on wages, the spending has begun to be affected.

However, consumers’ expectations of US inflation fell sharply according to the New York Fed survey. This suggests that Americans are confident that the price will fall in the coming years.

—With assistance from Kristy Scheuble, Reade Pickert, Liz Capo McCormick, Ana Monteiro, Maria Paula Mijares Torres, Lisa Abramowicz, Tom Keene Jordan Fabian.

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