Inflation slowed to 8.5% for the 12 months ending in July thanks to lower energy prices, according to the consumer price index, a welcome sign that price pressures might be peaking.
The much-anticipated numbers reported by the Bureau of Labor Statistics on Wednesday revealed that while it has fallen by 0.6 percentage points from the month before, annual inflation is still going strong despite the Federal Reserve’s interest rate hikes and is near the worst it has been since the Great Inflation that helped bring President Ronald Reagan to office.
INFLATION EXPECTATIONS TUMBLE AS FED GEARS UP FOR MORE RATE HIKES
The soaring inflation has eaten into President Joe Biden’s approval ratings as he and Democrats approach the midterm elections. Consumer prices have been rising fast since last August, especially for staples such as food and gas. In fact, until March’s CPI report, inflation had risen every month for eight months.
“CPI came in even lower than many expected,” Victor Claar, an economics professor at Florida Gulf Coast University, told the Washington Examiner shortly after the numbers were released. “Housing costs rose more than expected. So did services. Even though the index remained steady overall, escalating housing costs remain a concern since they are such a big share of most families’ monthly budgets.”
The gasoline index fell 7.7% in July, which offset increases in food and shelter costs. The energy index fell 4.6% on the month but is still up a sky-high 32.9% for the 12 months ending in July. Food prices have increased nearly 11% during that same period, according to the report.
So-called core CPI, which strips out volatile food and energy prices, increased by 0.3% in July, slightly more than expected. The figure shows that inflation is still a huge concern for the Fed and for the average consumer.
Wednesday’s CPI report comes as the central bank works to hike interest rates aggressively in order to dampen consumer demand and thus lower prices.
In July, following a two-day meeting, central bank officials announced that the Fed would increase its interest rate target by three-quarters of a percentage point. The central bank usually hikes rates by just a quarter of a percentage point, so the move was analogous to three concurrent rate hikes, which shows just how eager the Fed is to tame inflation.
Last month’s rate hike came after the Fed hiked rates by the same massive margin in June and conducted two other rate increases in March and May.
Adding to the inflationary flames is the war in Ukraine. The conflict has pushed energy prices through the roof because Russia is one of the world’s largest producers of oil and natural gas.
The Fed is expected to conduct another big rate hike in a month, the only question being the scale of that hike.
“Unless other numbers change significantly, this report likely won’t influence the Fed’s decision in September. Make no mistake: Consumers are still hurting,” Claar said.
The average price of gas in the United States broke record highs in June, surpassing $5 a gallon, according to AAA. Since then, oil prices have declined a bit, and gas is now averaging $4.03 per gallon, something that was expected to drive down headline inflation last month after sending it soaring in June.
In other bad economic news, GDP fell at a 0.9% annualized rate in the second quarter, according to the Bureau of Economic Analysis. The numbers come after negative 1.6% GDP growth in the first quarter. Many economists have traditionally regarded two quarters of negative GDP growth as recessionary.
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There are some factors pushing back on the notion that the economy is in a recession, though — the biggest one being the surprisingly strong labor market.
The economy beat forecasts and notched 528,000 jobs in July. The unemployment rate also surprised most economists by falling to 3.5%, the same super-low level it was at prior to the pandemic.
