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July CPI Report Proves Inflation Gauge Rose 3.2%, Less Than Expected

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In July, the consumer price index increased 3.2% from a year earlier, indicating that inflation has at least partially lost control over the American economy.

According to the Dow Jones estimate, prices increased a seasonally adjusted 0.2% for the month, the Bureau of Labor Statistics said on Thursday. Although higher than June and the first increase in more than a year, the annual rate fell just short of the forecasted 3.3%.

The so-called core CPI, which excludes volatile food and energy costs, rose 0.2% for the month, in line with expectations, and at a 12-month pace of 4.7%, which is the lowest since October 2021. The annual rate for the core was likewise marginally under the 4.8% Dow Jones consensus projection.

Markets responded favorably to the data, with Treasury yields generally falling and futures linked to the Dow Jones Industrial Average rising more than 200 points.

“It is not quite ‘mission accomplished’ yet, but significant progress on the inflation front has been made,” said Sung Won Sohn, chief economist at SS Economics and professor of economics and finance at Loyola Marymount University. “On balance, the inflation picture has improved significantly. The Federal Reserve will stop raising the interest rate soon.”

Housing expenses, which rose 0.4% in the month and were up 7.7% from a year ago, accounted for nearly all of the increase in monthly inflation. Rents grew by 0.4%. According to the BLS, that category, which makes up roughly one-third of the CPI weighted, was responsible for more than 90% of the increase.

Even though crude oil prices skyrocketed during the month and gas prices increased as well, the BLS reported that food prices increased by 0.2% on the month and energy prices increased by just 0.1%.

Medical care services had a 0.4% fall while used automobile prices fell 1.3%. After skyrocketing in the early stages of the Covid epidemic, airline fares dropped 8.1% on the month, matching their decline from June, and are down 18.6% from a year earlier.

“While it would be fair to describe prices as still relatively high in places such as shelter and used cars, we are witnessing a rate of change that is encouraging to consumers, as well as to Federal Reserve policymakers,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

The relatively low rates of inflation contributed to an increase in worker wages. According to a second statement from the BLS, real wages rose 0.3% month over month and 1.1% year over year.

Even though it was below estimates, the headline inflation rate increased from the 3% level in June.

The most recent data collection reveals that although inflation has decreased somewhat from its mid-2022 40-year highs, it is still significantly higher than the 2% level that the Federal Reserve prefers and high enough to make immediate interest rate reductions unlikely.

“While inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates,” said Seema Shah, chief global strategist at Principal Asset Management. “Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view.”

However, decelerating levels at least partially relieve the Fed’s need to continue tightening policy.

Officials from the central bank are anticipated to take a break in September after raising benchmark interest rates 11 times since March 2022. What happens next, though, is up for debate, and policymakers have expressed contrasting views in public.

Regional Fed Presidents John Williams of New York and Patrick Harker of Philadelphia expressed earlier this week that they could see an end to the rate hikes in their remarks. However, Governor Michelle Bowman stated that she anticipates further increases and colleague Governor Christopher Waller also hinted at future increases being likely.

Nearly all members of the Fed concur that the higher rates are likely to remain in place for a while, regardless of whether it approves any future hikes.

The increased rates have not yet slowed down economic growth: The GDP increased by 2.4% and 2% in the first and second quarters of 2023, respectively, and the Atlanta Fed anticipates 3.1% growth in the third quarter. Although payroll growth has slowed, it is still strong, and unemployment is close to its lowest level since late 1969.

Consumers are starting to feel a little stretched and are increasingly using credit cards and savings accounts for their purchases. According to figures from the New York Fed, total credit card debt exceeded $1 trillion for the first time this year.

However, despite the ruthless rate hikes, more economists are starting to believe the United States can avoid a recession. Recent predictions from Bank of America, Goldman Sachs, and JPMorgan Chase all indicated that a contraction was becoming less probable.

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