Inflation in the United States continued its downward trend in July 2024, with consumer staples like food, energy, and physical goods such as cars experiencing easing price pressures. The consumer price index (CPI), a crucial measure of inflation, rose by 2.9% in July compared to the previous year, according to the U.S. Department of Labor. This figure represents a decrease from the 3% inflation rate recorded in June and marks the lowest reading since March 2021.
Mark Zandi, the chief economist at Moody’s, expressed optimism about the latest CPI report, noting that inflation for groceries is growing at a slow pace. This positive trend, coupled with subdued inflation in other essential categories like gasoline and market rents for new tenants, is particularly encouraging for lower-income consumers who are facing financial challenges. The overall decrease in inflation is a welcome development after the pandemic-era peak of 9.1% in mid-2022, which was the highest level since 1981. Policymakers aim for a long-term inflation target of around 2%, and the current inflation rate is approaching this goal.
The Federal Reserve utilizes inflation data to guide its interest rate policies, with the central bank having raised rates to their highest level in 23 years during the Covid-19 pandemic to combat inflation. Recent labor market data has raised concerns among some investors about a looming recession, but many economists believe that these fears are exaggerated for the time being. Nevertheless, the combination of declining inflation and a cooling labor market is likely to prompt Fed officials to consider reducing interest rates at their upcoming policy meeting in September. Lowering interest rates would help reduce borrowing costs for consumers and businesses, providing a boost to the economy.
Housing remains a significant factor contributing to elevated inflation levels, economists point out. Shelter is the largest component of the CPI and has a substantial impact on inflation readings. The shelter index has risen by 5.1% since July 2023, accounting for more than 70% of the annual increase in the “core” CPI, which excludes food and energy costs. Despite a slight decline to 0.2% in June, shelter inflation rebounded to 0.4% in July. Housing inflation tends to fluctuate slowly due to the methodology used by the government to measure it, masking positive developments in the real-time rental market, where inflation has remained relatively stable for the past two years.
Excluding shelter costs, the CPI increased by 1.7% in July, falling below the Fed’s annual target. Economists anticipate that shelter CPI inflation will continue to gradually decrease as market rents follow prevailing trends. Other categories with notable increases in prices over the past year include motor vehicle insurance, medical care, personal care, and recreation, with inflation rates of 18.6%, 3.2%, 3.4%, and 1.4%, respectively. Economists attribute the high inflation in motor vehicle insurance to the surge in new and used car prices a few years ago, which has also impacted vehicle repair costs.
Egg prices have seen a resurgence following a reemergence of bird flu, rising by 19% compared to the previous year. Other food categories like bacon and crackers have also experienced price increases over the past year, but their prices declined in July, indicating potential future decreases. Overall grocery inflation was 1.1% in July, a significant drop from the average of 11.4% in 2022, which was the highest level since 1979. The inflation for physical goods spiked as the U.S. economy reopened in 2021, driven by disruptions in supply chains due to the pandemic and changes in consumer spending habits.
Goods inflation has since stabilized, while services inflation remains a concern due to its sensitivity to labor costs. However, economists predict that services inflation will decrease further as the job market softens and wage growth declines. High interest rates have also played a role in reducing overall inflation by curbing demand for goods and services. The combination of these factors has contributed to the gradual decline in inflation levels, offering some relief to consumers and businesses.
Overall, the July 2024 inflation report indicates a positive trend towards lower inflation rates across various sectors of the economy. While housing remains a key factor influencing inflation levels, other categories are showing signs of stabilization or even decline in prices. The Federal Reserve’s potential decision to cut interest rates in response to the easing inflation is expected to provide support to the economy and help maintain a balance between price stability and economic growth.
