Inflation cools to the lowest level

According to Wednesday’s report from the Labor Department, consumer prices edged up by just 0.2% from June to July, following a slight decrease the previous month. Over the past year, prices increased by 2.9%, down from 3% in June, marking the smallest annual rise since March 2021.

In July, year-over-year inflation fell to its lowest level in over three years, indicating that the severe price increases of the past four decades are subsiding. This trend could pave the way for the Federal Reserve to implement an interest rate cut in September. Inflationary pressures in the US are continuing to ease. In July, consumer prices increased by 0.2% compared to June, with this figure holding steady whether including or excluding energy and food costs (core rate). Although service prices rose slightly more than anticipated, the decline in goods prices was more pronounced.

The government noted that the inflation observed in July was primarily driven by higher rental and housing costs, though real-time data suggests this trend is beginning to ease. As a result, housing expenses are expected to rise more slowly in the coming months, which should help further reduce overall inflation.

The report indicates that inflation is steadily moving closer to the Fed’s 2% target, though not at a pace that might signal economic weakness, according to Tara Sinclair, an economist at George Washington University and former Treasury Department official.

“It’s a reassuring report because it’s progressing in the right direction without any drastic changes,” Sinclair noted. “This is exactly what we hoped for.”

Grocery prices

In July, grocery prices increased by just 0.1% and are only 1.1% higher than a year ago, reflecting a much slower growth rate compared to previous years. However, many Americans still face challenges with food costs, which remain 21% higher than they were three years ago.
Gas prices held steady from June to July and have decreased by 2.2% over the past year.

Some food prices, including for meat, fish and eggs, are still increasing faster than before the pandemic. Dairy and fruit and vegetable prices, though, fell in July.

Even as inflation — the rate of price increases — keeps slowing, many people are still struggling with daily costs that, on average, are still about 20% higher than they were three years ago. That’s true even though average U.S. wages have surpassed inflation for more than a year.

First Fed rate cut set for September

Federal Reserve Chair Jerome Powell is expected to use his Jackson Hole speech next week to lay the groundwork for a potential interest rate cut in September. However, the exact scale of the reduction will depend on the August jobs report, which will be released a week later, according to economists.
Krishna Guha, vice chairman of Evercore ISI, noted in a client briefing that Powell is likely to emphasize the importance of a "proactive" approach to rate cuts rather than a "reactive" one, setting the stage for upcoming monetary easing.

“US consumer prices rose by 0.2% in July compared to the previous month. The year-on-year rate fell from 3.0% to 2.9%. The more important core rate, which excludes the volatile prices for energy and food, printed 0.2%, too. The year-on-year rate fell here from 3.3% to 3.2%. The report was therefore in line with consensus expectations and our forecast.”

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