There is some optimism that inflation is slowing down because the rate of inflation in July was lower than anticipated.
According to Labor Department figures released on Wednesday, inflation decreased 0.6% from its June peak, for an annual rate of 8.5%. This was less than many predictions, including the 8.7% rate expected by 44 analysts in a Bloomberg survey.
The 7.7% drop in petrol costs, together with decreases in the cost of used cars, airline tickets, and clothing, is largely to blame for the decreasing pace of inflation. However, costs in major categories like housing and food continue to be high overall. Following a 1% rise in June, food prices rose by 1.1% in July.
For this reason, according to Greg McBride, chief financial analyst at Bankrate.com, it could be too soon to conclude that inflation has peaked based on these data.
According to the Labor Department, the following household goods and services have seen an increase in price during the past year:
- Gas: 44%
- Airline fares: 27.7%
- Electricity: 15.2%
- Food at home: 13.1%
- New vehicles: 10.4%
- Food away from home: 7.6%
- Used cars and trucks: 6.6%
- Shelter: 5.7%
- Apparel: 5.1%
- Beer: 4.6%
As long as inflation is strong, expect additional interest rate increases.
The Federal Reserve has already executed four rate increases in 2022, including two consecutive increases of 0.75% in June and July, to bring inflation down to a benchmark goal rate of 2%. Currently, the federal funds rate ranges from 2.25% to 2.50%.
These increases raise borrowing costs, which may impede economic progress. But it also implies that the cost of servicing debt for things like credit cards, vehicle loans, and personal loans would go up.
When the Fed meets in September, another interest rate hike appears to be all but inevitable given that inflation is still consistently high and is well above the baseline target rate of 2%. It is uncertain if those rate increases will be 0.5% or 0.75%, according to McBride.
