Consumer prices rose moderately in July amid lower costs for goods, including used cars, as the Federal Reserve’s battle to cool inflation showed signs of progress.
The Consumer Price Index — a closely-watched measure of inflation that tracks changes in the costs of everyday goods and services — rose 3.2% in July versus a year earlier, according to data released on Thursday.
July’s acceleration is slightly above June’s 3% annual gain in prices, though it pales in comparison to June 2022, when inflation peaked at 9.1% to hit a four-decade high.
“Today’s inflation report was reminiscent of the good old days,” George Mateyo, chief investment officer at Key Private Bank, wrote in a note following the report. “With both ‘headline’ and ‘core’ inflation rising 0.2% month-over-month, one could surmise that the post-pandemic inflationary impulse has faded.”
The core CPI — which excludes volatile food and energy prices — rose 0.2% from a month ago, matching the 0.2% increase in June.
The leveling off in the key gauge monitored by the Fed could sway the central bankers to halt another interest rate hike when the agency meets next month.
The CPI’s 3.2% increase was slightly lower than the 3.3% advance economists expected, though it remains above the Fed’s 2% target.
Core CPI was up 4.7% over the last 12 months, right on par with what economists expected.
Rising housing costs were by far the largest contributor to July’s uptick in prices, accounting for 90% of the advance, the Bureau of Labor Statistics reported.
The indexes for motor vehicle insurance, education and recreation also remained strong.
The food index increased 0.2% in July, with beef increasing the most, at 2.4%. Fruits and vegetables increased 0.4% last month, and egg prices fell another 2.2% month-over-month after dropping 7.3% in June and 13.8% in May.
Energy, meanwhile, rose 0.1%, despite pain at the pump as gas prices hit an eight-month high late last month.
Airline fares, used cars and trucks, medical care and communication decreased last month, the report said.
Markets reacted positively to July’s CPI report, with the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each up by at least 1%.
The latest figures come after the Fed hiked rates another 25 basis points to a 22-year high last month, making the benchmark federal-funds rate to a range between 5.25% and 5.5%.
Economists have been divided on whether more rate hikes are pending, especially since ratings agency Fitch downgraded the US top-tier sovereign credit from AAA to AA+, citing the possibility that the economy will slip into a mild recession later this year.
The view contradicts the opinion offered by Fed officials, who have said that they’re no longer forecasting a recession.
“We do have a shot” for inflation to return to target without high levels of job losses, Powell said.
According to LPL Financial’s Chief Economist Jeffrey Roach, Thursday’s CPI figures indicate “the Fed should be able to hold rates steady as the economy exhibits a bit more softness in economic growth.”
Others want to see more data, though Thursday’s figures were a promising indication that rates won’t increase too much further.
“We still have another CPI print before the next Fed meeting, but I think today’s data in isolation would bolster the case for a skip,” said Michael Contopoulos, head of fixed income at Richard Bernstein Advisors.
Greg Wilensky, head of US fixed income at Janus Henderson Investors, added: “If economic conditions continue as expected, we believe we have seen the last hike for this cycle. This makes us more constructive on adding interest-rate risk, particularly at the front of curve.”
Meanwhile, Raymond James’ Chief Economist Eugenio Aleman believes stubbornly-high shelter costs “are slated to put pressure on headline inflation going forward.”
“Thus, this better inflation reading does not change our view that the Federal Reserve is going to increase the federal funds rate at least once more before the end of this year,” Aleman wrote.
The Fed will also look at the Labor Department’s hiring report for July as it considers whether it’s done enough to snuff out inflation.
Last month, US employers added 187,000 jobs, the lowest number since COVID peaked in 2020, though unemployment remained little changed month-over-month, at 3.5%.
The labor market has showed surprising resiliency over the last couple of months, adding 209,000 jobs in June and a robust 339,000 jobs in May.
The US is currently enjoying a 30-month streak of monthly job gains.
