Price hikes slowed more than expected in July, and, for the first time in more than three years, the Consumer Price Index has landed below 3%.
That paves the way for the Federal Reserve to cut rates next month after a yearslong battle with inflation that sent rates spiking to a 23-year high. America’s economy is showing signs of stress, and now that inflation appears under control, the Fed can reduce borrowing costs to try to get job growth booming again.
Consumer prices rose 2.9% for the 12 months ended in July, slowing from June’s 3% annual gain, according to the Bureau of Labor Statistics’ latest CPI report released Wednesday.
On a monthly basis, prices rose 0.2% after posting a 0.1% decline the month before.
The S&P 500 gained 0.2% on Wednesday morning as investors parsed the latest inflation report. The Dow rose 18 points, or 0.04%, and the Nasdaq Composite added 0.4%.
The cost of owning and renting a home rose 0.4%. That so-called shelter index accounted for nearly 90% of the monthly increase, BLS said in the report.
Economists were expecting a 0.2% monthly increase and an annual rise of 3%, according to Fact Set consensus estimates.
Excluding gas and food, categories that tend to be quite volatile, core CPI rose 0.2% from June and saw its annual rate slow to 3.2% from 3.3%. Core CPI inflation is now running at its slowest pace since April 2021.
“Any Fed official waiting for a little more data to make the decision on whether to cut interest rates got it in spades this morning as while inflation isn’t dead, there is deflation in commodity prices which balances out the moderate inflation seen in some services prices, which is mainly generated from the higher costs of housing,” Christopher Rupkey, chief economist for FwdBonds LLC, wrote in commentary issued Wednesday.
“In fact, many prices in the CPI index have shown no net change over the last three months,” he added. “The risks for Fed officials at this point are more on the downside for the economy and labor markets rather than on the upside for inflation.”
The CPI, which measures the average change in prices for a commonly purchased “basket” of goods and services, has cooled down noticeably since briefly flaring up to start the year.
Wednesday’s report builds on a June report that was solidly positive (the overall index fell for the first time since April 2020) and helped assure the Federal Reserve and markets that inflation is indeed moderating.
The central bank has wanted to see more sustained progress in slowing inflation before loosening monetary policy; however, that calculus changed in recent months as the labor market slowed, and unemployment rose more sharply than expected.
A weaker-than-expected jobs report for July, with an estimated 114,000 jobs added and a jump in unemployment to 4.3%, sent markets into a tailspin last week as recession fears picked up steam.
This story is developing and will be updated.
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