Inflation Cooled in July, Welcome News for White House and Fed

Inflation cooled notably in July as gas prices and airfares fell, a welcome reprieve for consumers and a positive development for economic policymakers in Washington — though not yet a conclusive sign that price increases have turned a corner.

The Consumer Price Index climbed 8.5 percent in the year through July, a slower pace than economists expected and considerably less than the 9.1 percent increase in the year through June. After stripping out food and fuel costs to better understand underlying cost pressures, prices climbed 5.9 percent, matching the previous reading.

The marked deceleration in overall inflation — on a monthly basis, prices barely moved at all — is another sign of economic improvement that could boost President Biden at a time when rapid price increases have been burdening consumers and eroding voter confidence. The new data came on the heels of an unexpectedly strong jobs report last week that underscored the economy’s momentum.

The slowdown in overall inflation stemmed from falling prices for gas, airfares, used cars and hotel rooms, which canceled out increases in critical areas like food and rent. Because the categories in which prices fell can be volatile, and some of the goods and services that are rapidly increasing in price tend to be more slow-moving, the report’s underlying details suggested that inflation pressures remain unusually hot under the surface.

Even so, as some everyday purchases become cheaper at least temporarily and the job market stays strong, Americans may begin to feel better about their personal financial situations.

“It underscores the kind of economy we’ve been building,” Mr. Biden said on Wednesday. “We’re seeing a stronger labor market for jobs are booming and Americans are working and we’re seeing some signs that inflation may be getting to moderate.”

The slower price increases are also likely to reassure the Federal Reserve, which has been waiting for any sign that inflation is starting to moderate. But central bankers are likely to see this as a first step in the right direction rather than a definite victory, because the cost of many goods and services continued to pick up rapidly even as gas and travel-related price declines pulled overall inflation lower.

“On the surface, this is good news for the Fed,” said Omair Sharif, founder of Inflation Insights. “This is the first baby step toward the moderation they want to see on a regular basis.”

Policymakers have been hoping for more than a year that price increases will begin to cool, only to have those expectations repeatedly dashed. Supply chain issues have made goods more expensive, Russia’s invasion of Ukraine sent commodity prices soaring, a shortage of workers pushed wages and service prices higher, and a dearth of housing has fueled rising rents.

There have been recent signs of progress on at least two of these fronts, with gas prices falling and supply chain strains showing some improvement. Wednesday’s report also suggested that prices on hotel rooms and plane tickets have begun to ease, after surging this summer as people took long-delayed vacations. The question now is how durable the changes will prove.

A range of commodity prices have dropped in recent months, and gas in particular is becoming cheaper. The average cost of a gallon began to fall back toward $4 in July after peaking at $5 in June, based on data from AAA, which helped overall inflation to cool last month. That trend has continued into August, which should help inflation to continue to moderate.

But it is unclear what will happen next. The U.S. Energy Information Administration expects that fuel costs will continue to come down, but geopolitical instability and the speed of U.S. oil and gas production during hurricane season, which can take refineries offline, are wild cards in that outlook.

Likewise, supply chains that became roiled early in the pandemic — thanks first to a surge in consumer demand for couches, cars and other goods and later to the conflict in Ukraine — have recently shown signs of untangling. That trend should translate into less pricing pressure on goods in the months to come, but it’s hard to tell how big the effect might be.

An index of global supply chain pressures created by the Federal Reserve Bank of New York also shows that pressures have trended down since December. Importers are now paying about $6,632 on the spot market to move a 40-foot container from China to the west coast of the United States, compared with $18,346 at this time last year, according to data from Freightos Group. Average monthly delivery times on the same route are currently about 74 days, down from a peak of 99 days in January.

“It’s a massive traffic jam that is now unclogging,” said Phil Levy, the chief economist at Flexport, a freight-logistics company.

Some small part of the nascent slowdown in consumer prices could also tie back to the Fed’s rapid interest rate increases this year, which are meant to cool down consumer demand and slow business expansions. Central bankers have been raising interest rates since March and lifted them by three-quarters of a percentage point at each of their last two meetings, an unusually rapid pace of increase that has made for the fastest Fed campaign to constrain the economy since the 1980s.

Prices for used cars declined in July, which may be happening partly because borrowing costs are rising. Mortgage rates have shot higher this year and appear to be weighing on the housing market, which could be helping to drive prices for appliances lower.

But a Fed-induced cooldown is not yet the main story. Job gains remain robust, even as companies including Amazon and Alphabet, Google’s parent company, warily eye the economic outlook and slow hiring. Wages are still rising rapidly, and as that happens, so are prices on many services. Rents, which make up a big chunk of overall inflation and are closely linked to wage growth, continue to climb rapidly — which is concerning, because they tend to change course only slowly.

Rent of primary residence climbed 0.7 percent in July from the prior month, and is up 6.3 percent over the past year. Before the pandemic, that measure typically climbed about 3.5 percent annually.

Those forces could keep inflation undesirably rapid even if supply chains unsnarl and fuel prices continue to fall. The Fed aims for 2 percent inflation over time, based on a different but related inflation measure.

“The Covid reopening and revenge travel pressures have eased — and are probably going to continue easing,” said Laura Rosner-Warburton, senior U.S. economist at MacroPolicy Perspectives. But she also struck a note of caution, adding that “under the hood, we’re still seeing pressures in rent. There’s still sticky inflation here.”

As pressures on inflation remain, Fed officials have said that they will not be quick to pivot away from their effort to wrestle it lower. Another big rate move is on the table at their Sept. 20-21 meeting, though given how much more economic data they will have in hand between now and then, officials have been careful not to commit to a move of any particular size.

Investors interpreted the unexpectedly pronounced slowdown in July inflation as a sign that policymakers are likely to raise rates by half a point, rather than making a third three-quarter point increase. Several economists agreed that the new inflation report made a slowdown in rate increases more likely if the August inflation report — which will be released before the Fed’s meeting — confirms the July cooldown.

“It was as good as the markets and the Fed could have hoped for from this report,” said Aneta Markowska, chief financial economist at Jefferies. “I do think it removes the urgency for the Fed.”

But given how high inflation has been for more than a year now, Fed policymakers will avoid reading too much into a single report. Inflation slowed last summer only to speed up again into the autumn.

“We might see goods inflation and commodity inflation come down, but at the same time see the services side of the economy stay up — and that’s what we’ve got to keep watching for,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said during a recent appearance. “It can’t just be a one month: Oil prices went down in July, that’ll feed through to the July inflation report, but there’s a lot of risk that oil prices will go up in the Fall.”

Ms. Mester said she “welcomes” a slowdown in some types of prices, but that it would be a mistake to “cry victory too early” and allow inflation to continue without taking necessary action.

And for many Americans who are struggling to adjust their lifestyles to rapidly climbing costs at the grocery store and dry cleaners, an annual inflation rate that is still more than four times its normal speed is unlikely to feel like a big improvement, even as lower gas prices and rising pay rates do offer some relief.

Stephanie Bailey, 54, has a solid family income in Waco, Texas. Even so, she has been cutting back on meals at local Tex-Mex restaurants and new clothes because of the climbing prices, which she sees “everywhere.” At Starbucks, she opts for cold, noncoffee drinks, which in some cases are cheaper.

Her son, who is in his 20s, has a degree in chemistry and until recently worked at a vitamin manufacturer in Houston, has moved back in with his parents. Rent had become out of reach on his old salary. He is now teaching at a local high school.

“It’s just so expensive, with housing,” she said. “He was having a hard time making ends meet.”