U.S. consumer prices remained unchanged in July
Just a few years ago, a headline that read “Prices unchanged last month” would’ve created some angst in a global economy dominated by deflation risk. Today, it’s a source of relief for consumers and a source of reassurance for a Federal Reserve that’s looking for evidence that excessive inflation pressures are starting to buckle.
The consumer price index (CPI) remained flat in July, coming in below consensus expectations. Core inflation, which excludes more volatile food and energy prices, rose by 0.3% for the month. Over the past 12 months, the CPI increased by 8.5% — still well above the Fed’s target and consumers’ comfort zone; the 0.5% decline from July will once again raise hopes that the broad-based surge in prices during the past 18 months may finally be rolling over.
The recent sharp decline in oil and gasoline prices had been expected to be a significant source of relief for headline inflation numbers and that proved to be the case. Energy prices declined by 4.6% last month, despite July historically being a heavy travel month and for gasoline demand. Barring an unexpected reversal in the coming weeks, that trend should continue in August as prices at the pump have continued to fall.
From a big-picture perspective, the report provided good news for policymakers and consumers that have been desperate for good news. Still, there was ample evidence that the war on inflation is far from over.
Food prices rose by an uncomfortably high 1.1% again in July, with groceries rising by 1.3%. All households feel the impact of surging food prices to varying degrees, but the impact is particularly challenging for lower-income families that have less wiggle room to absorb higher costs for basic necessities. Food prices have risen by nearly 11% over the past year, easily outstripping average income gains. Still, there are signs that rising food prices may have also rolled over and could ease in the near term.
Similarly, shelter costs continue to rise at a brisk pace, climbing by another 0.5% in July and 5.7% over the past year. Typically, shelter is the largest expense for most households, although rising costs don’t impact all families similarly. Years of underinvestment in home construction have come to a head since 2020, contributing to overheating prices as potential buyers scrambled over one another, creating bidding wars for homes. Coupled with sharply higher home prices, surging mortgage rates have cooled demand significantly in recent months. Rising housing costs are reflected with a substantial lag in the CPI, so the effects of that cooldown aren’t yet apparent. For now, upward pressure under shelter costs is likely to persist but should ease in the coming months.
Consumer sentiment has been surprisingly poor in recent months, reaching depths not even seen during the global financial crisis. Not surprising is the fact that inflation has been the primary driver of that pessimism. One month of good news certainly won’t flip the switch for consumers, but it does provide renewed hope for better days ahead.
Similarly, the Fed will gladly embrace a month of flat prices, while acknowledging that core inflation remains problematic. Sticky inflation and tight labor markets still leaves more work to be done, and the big question surrounding the Fed’s next steps is not whether they will raise rates again, but the size of the September rate increase. The surprisingly robust July jobs report had shifted expectations toward a third consecutive 0.75% hike, but the CPI report may help policymakers make the argument for a more measured 0.5%.
The bottom line? Policymakers and consumers alike have been looking for any sign of relief on the inflation front, and the July report delivered it. Still, core inflation remains well above the Fed’s comfort zone, leaving much work to be done to suggest that the price stability component of its dual mandate is being achieved. In short: expect more rate hikes to come.
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