WASHINGTON — Year-over-year inflation reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the Federal Reserve for an interest rate cut in September.
Wednesday's report from the Labor Department showed that consumer prices rose just 0.2% from June to July after dropping slightly the previous month for the first time in four years. Measured from a year earlier, prices rose 2.9%, down from 3% in June. It was the mildest year-over-year inflation figure since March 2021.
The ongoing inflation slowdown could affect the presidential campaign, given that former President Donald Trump has highlighted rampant inflation as a key failing of the Biden administration and its energy policies. Vice President Kamala Harris has said she would soon unveil new proposals to “bring down costs and also strengthen the economy overall.”
The government said nearly all of July's inflation reflected higher rental prices and other housing costs, a trend that, according to real-time data, is easing. As a result, housing costs should rise more slowly in the coming months, contributing to lower inflation.
In July, grocery prices rose just 0.1% and are a scant 1.1% higher than they were a year earlier, a much slower pace of growth than in previous years. Yet many Americans are still struggling with food prices, which remain 21% above where they were three years ago, though average wages have also sharply increased since then.
Gas prices were unchanged from June to July and have actually fallen 2.2% in the past year. Clothing prices also dropped last month; they're nearly unchanged from 12 months earlier. New and used car prices fell in July, too. Used car prices, which had skyrocketed during the pandemic, have tumbled nearly 11% in the past year.
Some food prices, including for meat, fish and eggs, are still increasing faster than before the pandemic. Dairy and fruit and vegetable prices, though, fell in July.
Wednesday's report showed that inflation is steadily falling closer to the Fed's 2% target — though not too quickly, which might suggest that the economy is weakening, said Tara Sinclair, an economist at George Washington University and a former Treasury Department official.
“It’s a comforting report, both because it is going in the right direction and because it is not doing anything too dramatic," Sinclair said. “It is exactly what we wanted to see.”
Austan Goolsbee, president of the Federal Reserve's Chicago branch, said Wednesday in an interview with The Associated Press that the July data shows that inflation is clearly on track to return to the central bank's 2% target. He also noted that there are signs that the job market is weakening even while the Fed’s key rate remains at its highest level in decades.
Goolsbee's remarks suggested that he would support a series of rate cuts in the coming months.
“If you take the last seven months of last year and now the past several months, they show very strong progress on inflation,” he said. “And the employment side is at least cooling. So I think it is worth our thinking about that quite seriously.”
For nearly a year, cooling inflation has provided gradual relief to America’s consumers, who were stung by the price surges that erupted three years ago, particularly for food, gas, rent and other necessities. Inflation peaked two years ago at 9.1%, the highest level in four decades.
In July, excluding volatile food and energy costs, so-called core prices climbed a mild 0.2% from June, after a 0.1% increase the previous month. And compared with a year earlier, core inflation slowed from 3.3% to 3.2% — the lowest level since April 2021. Core prices are closely watched by economists because they typically provide a better read of where inflation is headed.
Fed Chair Jerome Powell has said he is seeking additional evidence of slowing inflation before the Fed begins cutting its key interest rate. Economists widely expect the Fed’s first rate cut to occur in mid-September.
When the central bank lowers its benchmark rate, over time it tends to reduce the cost of borrowing for consumers and businesses. Mortgage rates have already declined in anticipation of the Fed’s first rate reduction.
Many companies have slowed their price increases as consumers have become more resistant to paying more. Mark Barrocas, CEO of SharkNinja, a small appliance-maker in Needham, Massachusetts, said the company raised its prices 5% to 7% in 2021 and 2022 but hasn’t done so since.
Barrocas noted that people are becoming more discerning and are expecting more from the products they buy with prices so much higher than they were a few years ago.
“You really have to think very, very carefully about the long term effects of raising prices,” he said.
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