Progress on inflation stalled in July, as prices nudged up

Inflation pressures continued to ebb through most of the U.S. economy last month, although a rebound in grocery prices and energy costs led to the first rise in overall consumer price growth in over a year.

Prices rose 3.2% in July from a year ago – outpacing June’s inflation rate of 3% and marking the first increase after 12 months of steady declines, according to data released Thursday by the Bureau of Labor Statistics.

On a monthly basis, prices ticked up 0.2% between June and July.

But economists say the bump is linked to temporary factors – including rebounding energy prices – that are not likely to erode longer-term progress.

The overall number was also higher because prices are being compared with the rates of increase last July, the first month when inflation began to fall after a long climb.

Overall inflation has come down sharply from last summer’s peak of 9.1%.

“In the grand scheme, we’re still seeing disinflation, and things are moving in the right direction,” said Pooja Sriram, U.S. economist at Barclays.

“If you look past the volatile categories, underlying momentum hasn’t changed.”

The Federal Reserve has been aggressively cranking up interest rates in hopes of slowing the economy enough to control inflation.

It has raised borrowing costs 11 times since last year, pushing rates to their highest level in decades, which has tempered the housing market and helped cool hiring.

Even so, the economy has remained surprisingly resilient: Unemployment is low, wages are rising, and families and businesses continue to spend.

As a result, many economists have scrapped their recession forecasts for the year in favor of a rosier outlook, including the possibility that the Fed can bring down inflation without widespread job losses or a broader economic downturn.

The latest data shows that inflation is continuing its descent across the economy in many categories. Airline fares dropped 8.1% in July, while the cost of used cars and trucks fell 1.3%.

Prices for household furnishings, new cars and medical care also notched declines.

“The easy work in bringing inflation rates down is complete,” Tom Garretson, senior portfolio strategist for RBC Wealth Management, wrote in a note this week. “Further progress will continue, but at a slower pace.”

Still, the fight against rising prices isn’t a done deal. Housing, car insurance, education and recreation all got costlier in July.

Some economists are predicting that rising oil and gas costs could lead to another rise in inflation in August, although they expect prices to settle back down this fall.

“Core” inflation – a closely watched measure that excludes food and energy costs, which tend to fluctuate more than other sectors – remains stubbornly elevated.

In July, it rose 0.2%, keeping in line with the previous month’s growth and holding at a level similar to prepandemic monthly gains.

Although the Fed appears to be approaching the end of its rate-hiking effort, economists say higher inflation could complicate the picture.

The central bank won’t set new interest rates until its September meeting, by which point another month’s worth of inflation figures will have been released.

“Given the weakness we’ve seen in some economic data of late, I think any re-acceleration in inflation would change the narrative around what the Fed is going to do,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“The market is basically betting that the Fed has paused. But if you start to develop hotter inflation or something that’s not a continuation of the disinflationary trend, that’s not a great recipe.”

What’s important, economists say, is not just whether inflation is coming down, but exactly how it is doing so.

They are keeping a close watch on whether recent declines in rental costs – which are used as a stand-in for housing prices, and operate on a delay – will begin to push down official inflation readings.

So far, shelter costs have continued to rise. In July, they contributed to more than 90% of the month’s overall inflation.

Policymakers are also paying particular attention to hikes in the costs of services apart from energy and housing, a measure Fed Chair Jerome H. Powell has highlighted as closely linked to wages and the labor market.

Wall Street, which had expected an even higher inflation reading, was heartened by the latest data.

President Biden was similarly upbeat.

He cheered the economy’s progress and stressed that the job market remains strong, with wage growth now outpacing inflation for most Americans.

“We’ve made this progress while maintaining the broad strength of our economy,” he said in a statement.

Policymakers have stressed that the path to lower inflation could be rocky, and economists say recent fluctuations in some sectors are making it difficult to chart longer-term trends.

Some of the summer’s biggest swings have come from food and energy costs.

Meat, fish, eggs and dairy products all got pricier in July following two months of declines.

Meanwhile, Brent crude oil prices, for example, are up 17% since June, while average gasoline prices have risen 7% to $3.83 per gallon, AAA data shows.

“The biggest issue going forward is that gasoline prices have skyrocketed,” said Eugenio Aleman, chief economist at Raymond James.

“It’s worrisome because gas prices have a huge impact on consumers’ views on inflation and the economy.”

The fear, he said, is that higher prices can easily become self-fulfilling.

The more people and businesses worry about continued inflation, the more likely they are to stoke future price increases.Americans have recently begun feeling better about the direction of prices – inflation expectations for the coming year have fallen for two months in a row, though they remain higher than they did in early 2021, according to data from the University of Michigan.

Higher gas prices, Aleman said, could quickly change the picture.

For now, though, many service-related costs are beginning to stabilize because of waning demand.

Americans have recently begun pulling back on dining out, flying and sporting events as they work through extra pandemic-era savings.

Delinquencies on mortgages and car loans are edging up, and consumers are sitting on a record $1 trillion in credit card debt, according to data released this week by the New York Fed.

Gary Watson, who owns a mobile massage business near Phoenix, spends as much as six hours a day driving to clients.

He charges a $1.25 travel fee for every mile he drives, but says he’ll have to raise that to $1.50 if gas prices keep trending up.

Watson recently traded in his Ford F-150 pickup truck for a hybrid Kia SUV to save on gas, and he only fills up at Costco and Sam’s Club, which tend to have low prices.

Still, he says, he’s worried that rising costs will weigh on demand.

“I have to constantly watch gas prices,” he said. “They’re going up again, so I’m over here thinking, ‘Okay, I’m going to have to charge more.’ Will it affect my business? Of course. Fewer people are willing to pay when costs go up.”