Washington — Falling prices for gasoline, airline tickets and clothing brought some relief to Americans last month, though headline inflation is still near its highest level in four decades.
Consumer prices jumped 8.5% in July from a year earlier, the government said on Wednesday, compared with a 9.1% year-on-year increase in June. On a monthly basis, prices remained unchanged from June to July, the first time this has happened after 25 months of increases.
The report offered good news for congressional Democrats and President Joe Biden as the midterm elections approach. Biden pointed to the flat monthly inflation figure.
“I just want to say a number: zero,” he told reporters. “Today we learned that our economy recorded zero percent inflation in the month of July.”
Republicans, who have made inflation a top campaign issue, pointed out that prices are still painfully high. Texas GOP Rep. Kevin Brady pointed to grocery costs and said Americans “continue to struggle under President Biden’s cruel economy, with dwindling paychecks, a dwindling economy, and a declining workforce.
The reprieve offered no certainty that prices would continue to fall. Inflation has slowed in recent years and accelerated again in the following months. And even if price increases continue to weaken, they are far from the Fed’s 2% annual target.
“There are good reasons to believe that inflation will continue to slow,” said Michael Pugliese, economist at Wells Fargo. “What I think gets lost in this discussion is how long?”
Even if it were to fall to 4% – less than half of its current level – Pugliese suggested the Federal Reserve should continue raising interest rates or at least keep them high.
Much of last month’s relief was felt by travellers: hotel room prices fell 2.7% from June to July, air fares nearly 8% and car rental prices from 9.5%. These price declines followed strong increases over the past year after COVID-19 cases eased and travel rebounded. Air fares are still nearly 30% higher than a year ago.
Gasoline prices rose from $5 a gallon, on average, in mid-June to $4.20 late last month, and were just $4.01 on Wednesday, according to AAA. Oil prices have also fallen and cheaper gas is also expected to lower inflation this month, economists said.
Declines in travel-related prices last month helped reduce underlying inflation, a measure that excludes the volatile food and energy categories and provides a clearer picture of underlying price trends. . Core prices rose just 0.3% from June, the smallest month-over-month increase since March. Compared to a year ago, core inflation rose to 5.9% in July, the same year-on-year increase as in June.
All told, the July numbers raised hopes that inflation may have peaked after more than a year of relentless increases that have strained household finances, soured Americans on the economy , led the Federal Reserve to aggressively raise borrowing rates and lowered President Joe Biden’s approval ratings. .
Americans are still absorbing larger price increases than they have in decades. Grocery prices jumped 1.1% in July and are 13% higher than a year ago, the largest year-over-year increase since 1979. bread jumped 2.8% last month, the highest in more than two years. Rental and medical costs increased, although slightly less than in previous months.
A strong job market and healthy wage increases have encouraged more Americans to move on their own, reducing the number of available apartments and driving up rental costs. Home and trailer park purchases on Wall Street also boosted monthly payments.
Average paychecks are rising faster than they have in decades, but not fast enough to keep up with inflation. As a result, some retirees have felt the need in recent months to return to the labor market.
Among them is Charla Bulich, who lives in San Leandro, California. For the past six months, Bulich, 73, has worked a few hours a week to care for an elderly woman because her social security and food stamps don’t cover her rising costs.
“I go over budget all the time – that’s why I had to look for a job,” Bulich said. “I wouldn’t even think of buying hamburger meat or a steak or anything like that.”
Now she fears losing her food stamps in the coming months because of her extra income.
Michael Altfest, director of community engagement at the Alameda County Community Food Bank in Oakland, said his organization now provides about 4.5 million pounds of food a month, up from less than 4 million in January. The group also budgeted for a 66% increase in fuel costs. This is mainly because of higher gas prices, but also because he is now using more trucks to meet the demand for food.
Altfest’s rent recently jumped 14%, he said, forcing him to recalibrate his budget.
“All of these costs go up, all of a sudden,” he said. “People here were already exhausted.”
The modest slowdown in inflation last month could allow the Fed to slow the pace of its short-term rate hikes at its meeting in late September — a possibility that sent stock prices soaring. The speed and magnitude with which the Fed raises borrowing costs has significant effects on the economy: steeper increases tend to reduce consumer and business borrowing and spending and make a recession more likely. .
If the Fed doesn’t have to raise rates that high to rein in prices, it’s more likely to engineer an elusive “soft landing,” in which growth slows enough to rein in high inflation, but not at all. point of causing a recession.
Still, Fed Chairman Jerome Powell stressed that the central bank needed to see a series of lower readings on core inflation before pausing rate hikes. The Fed has raised its short-term rate by 2.25 percentage points in the past four meetings, the fastest string of increases since the early 1980s.
Biden pointed to lower gasoline prices as a sign that his policies — including large releases from the country’s Strategic Petroleum Reserve — are helping to reduce higher costs that have hurt household finances, especially for low-income Americans and black and Hispanic households.
Other signs indicate that inflation could subside in the coming months. According to a survey by the Federal Reserve Bank of New York, Americans’ expectations for future inflation have declined, likely reflecting lower gasoline prices that are very visible to most consumers.
Inflation expectations can be self-fulfilling: if people think inflation will stay high or get worse, they are likely to take actions – such as demanding higher wages – that can drive up prices in a self-perpetuating cycle.
Companies then often increase their prices to compensate for the increase in their higher labor costs. But the New York Fed’s survey found that Americans expect lower inflation in the next one, three and five years than a month ago.
Supply chain issues are also easing, with fewer ships docked off Southern California ports and shipping costs falling. Prices for commodities such as corn, wheat and copper fell sharply.
Stubborn inflation is not just an American phenomenon. Prices have jumped in the UK, Europe and less developed countries like Argentina.
UK inflation rose 9.4% in June from a year earlier, a four-decade high. In the 19 countries that use the euro, it reached 8.9% in June compared to a year earlier, the highest since the start of the registration of the euro.