Michelle ThompsonIn July, price increases moderated more than anticipated, with the Consumer Price Index falling below 3% for the first time in over three years. This may lead the Federal Reserve to lower rates next month after struggling with high inflation that pushed rates to a 23-year peak. Despite signs of economic strain, the Fed might cut borrowing costs to boost job growth.
Consumer prices rose by 2.9% for the year ending in July, easing from June’s 3% gain, as reported by the Bureau of Labor Statistics. Monthly, prices increased by 0.2%, reversing a 0.1% decline from the previous month.
Economists had forecasted a 0.2% monthly rise and a 3% annual increase. Sung Won Sohn of Loyola Marymount University noted that breaking the 3% threshold is a significant positive sign, indicating inflation is decreasing and disinflation is progressing.
Core CPI, excluding volatile categories like gas and food, increased by 0.2% from June and slowed to 3.2% annually, its slowest rate since April 2021. Shelter costs, which rose by 0.4%, contributed nearly 90% of the monthly increase.
The S&P 500 rose 0.4% on Wednesday, with the Dow gaining 242 points (0.6%) and the Nasdaq Composite edging up by 0.03%.
The significant impact of home prices on overall inflation is notable.
Shelter, comprising over a third of the CPI, has been a major obstacle to inflation’s decline. However, experts believe this challenge will eventually ease.
The BLS’s housing-related price measurements lag and are complex, including estimated rental values of owner-occupied homes. Recently, the shelter index is starting to reflect slower or even falling rent hikes seen in reality. During the pandemic and subsequent economic rebound, high demand for remote work strained housing inventory, and the Fed’s rate hikes worsened borrowing costs for renters, buyers, and builders, according to economist Brian Bethune.
Bethune noted that the aim was to make demand fall more than supply in the short term. Persistent issues could worsen the chronic housing shortage.
The shelter index rose 5.1% year-over-year through July but has been decreasing from a peak of 8.2% in March 2023. According to Sung Won Sohn, the inflation outlook should improve going forward.
Excluding shelter, the CPI increased by 1.7% for the year ending in July. Energy prices, including gasoline, were stable in July, while food prices saw modest increases: grocery prices up 0.1% and restaurant prices up 0.2%. Annually, grocery and restaurant prices rose by 1.1% and 4.1%, respectively.
Goods experienced continued disinflation and deflation in July, while services increased by 0.3%. The BLS reported decreases in indexes for used cars, medical care, airline fares, and apparel.
An ‘unequivocally’ positive report sets the stage for potential rate cuts.
Although the Consumer Price Index (CPI) is commonly used to measure inflation, the Federal Reserve prefers the Personal Consumption Expenditures (PCE) price index, which showed a 2.5% increase in June. Robert Triest, an economics professor at Northeastern University, anticipates that the PCE data, set to be released later this month, will be even more promising.
The PCE index incorporates components from the CPI and the recent Producer Price Index, but places less emphasis on shelter costs. Triest believes the PCE figures will be more favorable than CPI, potentially leading the Fed to lower the federal funds rate.
The Fed is expected to reduce its benchmark interest rate by at least 0.25% in the upcoming meeting, with some forecasts suggesting a 0.50% cut following a weak jobs report. The CME FedWatch tool indicates a 56.5% chance of a 0.25% cut and a 43.5% chance of a 0.50% cut as of Wednesday morning.
Jared Bernstein, chair of the White House Council of Economic Advisers, highlighted the latest CPI data but noted that work remains to address high costs affecting many families. This update includes recent developments, and stock levels may shift as the day progresses.
Emily Martinez
