Inflation in July 2024 continued its downward trend, with prices easing for consumer staples like food and energy, as well as physical goods such as new and used cars. The consumer price index (CPI), a key measure of inflation, rose by 2.9% from a year ago, according to the U.S. Department of Labor. This marks a decrease from the 3% recorded in June and is the lowest reading since March 2021.
Analysts like Mark Zandi, chief economist of Moody’s, view this latest CPI report as positive news. Zandi noted that inflation for groceries is growing slowly, alongside similar trends in other essential items like gasoline and market rents for new tenants. This bodes well for lower-income consumers who are facing financial challenges.
The decline in inflation is significant compared to the peak of 9.1% during the pandemic in mid-2022, the highest level since 1981. It is also approaching the long-term target of around 2% set by policymakers. Joe Seydl, senior markets economist at J.P. Morgan Private Bank, believes that the worst of inflation may be behind us, signaling a positive outlook for the economy.
The Federal Reserve uses inflation data to guide its interest-rate policy. During the Covid-19 pandemic, the Fed raised rates to their highest level in 23 years to combat inflation. However, recent labor market data has raised concerns about a potential recession. Despite these fears, many economists believe that the current economic conditions do not warrant such worries.
With inflation easing and the labor market cooling, experts predict that the Fed may start cutting interest rates at the next policy meeting in September. This move would reduce borrowing costs, providing a boost to the economy. Paul Ashworth, chief North America economist at Capital Economics, sees the latest CPI report as supporting a potential rate cut in September.
One major factor keeping inflation above the Fed’s target is housing. Shelter is the largest component of the CPI and has a significant impact on inflation readings. The shelter index has risen by 5.1% since July 2023, accounting for over 70% of the annual increase in the core CPI. Despite a slight decline in June, shelter inflation rebounded to 0.4% in July.
Housing inflation moves slowly due to the way it is measured by the government. While the real-time rental market has shown stability for the past two years, the official data does not always reflect this accurately. Mark Zandi suggests that excluding shelter from the inflation calculation would bring the CPI closer to the Fed’s target.
Excluding shelter, the CPI increased by 1.7% in July, below the Fed’s annual target. Economists anticipate that shelter CPI inflation will continue to decrease gradually, aligning with market trends for rental prices. Other categories such as motor vehicle insurance, medical care, personal care, and recreation have also seen notable increases over the past year, according to the Bureau of Labor Statistics (BLS).
Prices for items like motor vehicle insurance and medical care have risen significantly, driven by factors like the surge in new and used car prices a few years ago. Economists believe that insurance inflation will subside as car prices decrease. Egg prices, which had spiked in 2022 due to a bird flu outbreak, are rising again following a resurgence of the disease.
While certain food categories like bacon and crackers have seen price increases over the past year, there were declines in their prices in July, indicating potential future drops. Overall annual grocery inflation in July was 1.1%, a significant decrease from the average of 11.4% in 2022, the highest since 1979.
Inflation for physical goods spiked in 2021 as the economy reopened after the pandemic. Supply chain disruptions and changes in consumer spending patterns contributed to this increase. However, goods inflation has stabilized, while the services sector remains a challenge. Services inflation, which is more sensitive to labor costs, is expected to ease due to a weaker job market and declining wage growth.
High interest rates have also helped reduce inflation by curbing demand, according to experts like Joe Seydl. Overall, the outlook for inflation is positive, with the potential for further rate cuts by the Fed to support economic growth.
