Inflation picked up in July, breaking a 12-month streak of slowing consumer price increases.
The rise was largely due to a technicality in the calculation of yearly price gains but it underscores that the rest of the battle to tame a historic spike in consumer costs could be more challenging.
Consumer prices overall increased 3.2% from a year earlier, up from 3% in June, according to the Labor Department’s consumer price index.
That still marks a significant pullback from June 2022, when annual inflation peaked at a 40-year high of 9.1%. The acceleration in yearly price increases was mainly due to the fact that inflation already had cooled some by July 2022 and so the gap in prices between that month and July 2023 was larger.
On a monthly basis, prices rose a modest 0.2% following a similar increase in June, as another decline in used car prices costs offset a further surge in rent.
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Still, the report points to a more gradual descent in inflation in the months ahead. Because of a projected rise in energy prices, Barclays expects annual inflation to end the year roughly unchanged at 3.2%.
What is the difference between CPI and core CPI?
More critically, core prices, which exclude volatile food and energy items and which the Federal Reserve watches more closely, are still elevated. They rose by a measured 0.2% the same as in June. Yet that left the annual increase at 4.7%, down just slightly from June’s 4.8% increase.
Broadly, prices for goods, such as used cars and furniture, have declined recently as pandemic-related supply chain snarls have resolved. But the cost of services, such as rent, car repairs, auto insurance and haircuts have risen briskly.
Will there be more rate hikes in 2023?
The Federal Reserve is especially concerned about the cost of services, excluding housing, which are tied closely to wage growth. Pay increases remain strong and the Fed believes it can help contain them by raising interest rates to cool the labor market.
While services inflation has eased recently, Barclays says that’s largely because of drops in hotel rates and airfares, which are volatile. Air fares have fallen in part because of lower jet fuel costs.
As a result, the research firm believes the Fed will decide to raise its key interest rate once more by the end of the year after hiking rates by more than 5 percentage points in 15 months. Other economists say there has been enough progress in the inflation fight for the Fed to hold rates steady.
Dow Futures
Prior to markets opening and the CPI release, futures were up Thursday morning. Dow Jones futures were 0.45%, higher, while the S&P and NASDAQ were up 0.43% and 0.53% respectively. Treasuries however were down 3.99%.
Want to understand more about inflation and its impact on the economy? More below:
What is inflation?
Inflation is basically measured by comparing the current price of goods and services to their recent price history. Several government-released data sets help to determine those numbers.
The Consumer Price Index, or CPI, is the primary gauge. It measures the costs of goods in an urban market, which represents more than 90% of Americans, and is issued each month by the U.S. Bureau of Labor Statistics.
The CPI looks at a ‘fixed basket’ of roughly 80,000 goods and services. What gets put into that basket depends on the Consumer Expenditures Survey which surveys consumers to figure out which goods are important. The primacy of those goods then sets their weight in the CPI. For instance, the price of gasoline, which is a key factor in many Americans’ cost of living, has a greater weight than most other items.
There’s another version of the CPI however. The Chained Consumer Price Index for All Urban Consumers is used to adjust tax brackets. That index notes the substitution of similar items, which often happens when prices rise amid inflation. That flexibility in which items are evaluated gives a more accurate snapshot of consumer spending and doesn’t overstate inflation.
The rate of price hikes can also be gauged through the price index for Personal Consumption Expenditures (PCE). This metric, released by the Bureau of Economic Analysis, has a wider lens. Instead of looking at the shift in prices for goods paid solely out of pocket by consumers, the PCE looks at all expenses, including health care coverage that is covered by insurance.
The Fed considers the PCE the gold standard for assessing inflation. The central bank has a 2% inflation goal.
There’s one more metric – ‘core inflation’ – which measures inflation but leaves out the costs of food and energy whose costs are more volatile.
How does raising rates lower inflation?
The federal funds rate is what banks charge each other for overnight loans. If that rate rises, banks generally pass on that additional cost, meaning it becomes more expensive for businesses and consumers to borrow as rates rise on everything from adjustable-rate mortgages to credit cards. That makes the funds rate a key lever for the Federal Reserve to pull when it’s trying to control inflation.
When rates rise and borrowing slows, an overheated economy cools down and that can put the brakes on the rate of price increases.
When was the last CPI report?
The last CPI report was released on July 12.
U.S. inflation rate history
The inflation rate has tumbled, falling by more than half from its peak of 9.1% in June, 2022. But it remains above the 2% target favored by the Federal Reserve. Here’s a snapshot of the U.S. inflation rate by month since May 2022:
- May 2022: 8.6%
- June 2022: 9.1%
- July 2022: 8.5%
- Aug 2022: 8.3%
- Sept 2022: 8.2%
- Oct 2022: 7.7%
- Nov 2022: 7.1%
- Dec 2022: 6.5%
- Jan 2023: 6.4%
- Feb 2023: 6.0%
- Mar 2023: 5.0&
- Apr 2023: 4.9%
- May 2023: 4.0%
- June 2023: 3.0%
Key inflation report
The Federal Reserve decides whether to raise, lower or leave interest rates where they are based on achieving its twin goals of price stability and maximum employment. The CPI is a key measure the Fed uses to determine if prices are “stable.”
“CPI probably gets more press, in that it is used to adjust social security payments and is also the reference rate for some financial contracts,” the Cleveland Fed said.
In July, the Federal Reserve boosted its key interest rate by a quarter point to a range of 5.25% to 5.5%, the highest level in 22 years. It indicated another increase is a possibility even though inflation has been waning and is far below the four-decade peak it reached in June, 2022.
The Fed’s next meeting will be September 19 and 20th.
Inflation data today
Annual inflation was 3% in June, dropping from 4% the previous month and down dramatically from 9.1% in June 2022 – the highest rate in forty years. The most recent uptick was the slimmest rise in inflation since March 2021. The smaller bump in overall prices was largely the result of a steep decline in energy costs – though they increased month over month – and food prices that were still rising but at a slower pace.
The June rate was good news for consumers buying certain products, but remained higher than the 2% target sought by the Federal Reserve which has been aggressively raising interest rates to calm inflation.
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