After 12 consecutive months of reduction, U.S. inflation increased in July, driven by higher housing costs. However, core inflation, which excludes volatile food and energy costs, was equal to the lowest monthly increase in nearly two years.
On Thursday, the government stated that inflation had jumped to 3.2% over the previous year. That was a significant increase from June’s pace of increase (3%) which was the slowest in almost two years. Inflation in July was over the Federal Reserve’s 2% objective but well below the 9.1% annual high seen last year.
However, the Fed, economists, and investors pay special attention to the core inflation numbers to gauge the direction of future inflationary pressures. Core inflation was stable at July’s 0.2 percent from June’s reading.
The Fed will be looking at a number of indicators, including pricing data released on Thursday, to determine if they should keep raising interest rates. The Fed has raised its benchmark rate 11 times since March 2022, reaching a 22-year high as it attempts to rein in inflation.
Some of the latent inflation pressures in the economy have been reignited by the recent spike in oil prices. According to AAA, the national average price of a gallon of petrol has risen by roughly 30 cents in the previous month, to $3.83.
Economists believe that the easiest part of the battle against inflation has been won. To give just one example, petrol prices have fallen significantly from their national average high of almost $5 per gallon in June of last year, shortly after Russia’s invasion of Ukraine.
The dramatic economic comeback from the pandemic recession of 2020 swamped ports, industries, and freight yards, leading to a surge in inflation that began in 2021. Because of this, there were holdups, component shortages, and increased costs. However, bottlenecks in the supply chain have diminished during the past year, easing the rising pressure on product pricing. Durable manufactured items saw price decreases in June.
Wage inflation is a major concern for the Federal Reserve since it affects service industries such as restaurants, hotels, and entertainment venues. Due to severe staff shortages, numerous service providers have significantly increased wages.
For instance, the Labour Department announced last week that average hourly salaries increased by 4.4% in July from a year earlier, which was beyond expectations. Companies have traditionally responded to rising labour costs by increasing prices, contributing to inflation.
The fact that prices increased rapidly in the first half of last year before moderating in the second half is another factor working against further declines in year-over-year inflation rates. In this sense, a price increase in July would have an additive effect on the annual inflation rate.
Economists, however, warn against drawing too many conclusions from a single month’s data. Many of them anticipate that inflation will remain on a downward trajectory.
After a sharp increase following the epidemic, prices for used automobiles have recently begun to decline. According to Edmunds.com, they fell in July by 5.1% year-over-year to $29,198. The global shortage of computer chips contributed to a surge in the price of secondhand cars that peaked in July of last year. Customers searching for new cars but coming up empty flooded the used car market, driving up prices significantly.
Used car prices have been falling this year as automakers have acquired more chips and are producing a larger quantity of new automobiles. Many consumers who had to go to the used car market are once again looking at brand new automobiles. It is anticipated that the value of used automobiles will fall during the year.
The employment cost index published by the U.S. Department of Labour showed slower growth from April through June, alleviating some of the persistent concerns about rising labour costs. Workers had a 1 percent increase in wages, below the 1.2 percent increase seen in the first three months of 2023 (excluding government jobs). After increasing by 5.1 percent year over year in the first quarter, wage and salary growth slowed to 4.6 percent in the second.
The post-pandemic increase in rents is also beginning to level off. The Federal Reserve Bank of San Francisco published an article this week predicting that “year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024.”
Prior to making any decisions on future rate hikes, Fed policymakers will have a wealth of information at their disposal. The policymakers will receive two CPI reports before their next meeting on September 19-20, the first of which will be released on Thursday. In addition, on August 31 they will have access to their preferred inflation indicator, the personal income and expenditures price index. As for the employment situation, it will be reported on September 1.
Nearly 87% of traders expect no Fed raise next month, according to the CME Group’s FedWatch Tool, confirming the predictions of many economists and market observers.
