US consumer prices rose moderately in July, as higher rents were mostly offset by lower costs for goods such as cars and furniture, a trend that may convince the Federal Reserve to leave interest rates unchanged next month.
The report released by the Labor Department on Thursday also showed that core inflation pressures eased further last month. The annual increase in prices excluding the volatile food and energy components, or so-called core inflation, was the smallest in nearly two years.
Moderate inflation, along with a cooling of the labor market, has strengthened economists’ conviction that the US central bank will be able to engineer a “soft landing” for the economy, after a year of worrying about a recession.
“There’s been a lot of progress on the inflation front, and there’s a clear ongoing trend of inflation,” said Song Won-soon, professor of finance and economics at Loyola Marymount University in Los Angeles. “It is time for the central bank to stop its campaign to beat inflation, it will have to wait and see for a while.”
The consumer price index rose 0.2% last month, matching its gain in June. Shelter accounted for more than 90% of the increase in the CPI, with rental costs increasing by 0.4%.
Food prices increased by 0.2%. Grocery prices rose 0.3% after remaining unchanged in June. It has been boosted by higher prices for eggs, beef and dairy products as well as fruits and vegetables. Grocery store prices, however, slowed dramatically, rising 3.6% year-on-year in July after peaking at 13.5% in August 2022.
Restaurant meal prices rose 0.2%, slowing to pre-pandemic trends. The cost of energy products rose 0.1%, with a slight increase in gasoline prices. The price jump at the pump in late July is likely to be reflected in the August inflation report.
The CPI advanced 3.2% in the 12 months through July. This followed a 3.0% rise in June, the smallest year-over-year gain since March 2021.
The annual rate of consumer price index rebounded for the first time in 13 months when calculated from a lower base after prices cooled last July after a jump that lifted inflation to a pace not seen in more than 40 years.
Annual consumer prices have declined from a peak of 9.1% in June 2022. The consumer price index has increased at an annualized rate of 1.9% over the past three months, the slowest pace since June 2020, from 2.7% in June. The Fed has an inflation target of 2%.
Economists polled by Reuters had expected the consumer price index to rise 0.2 percent last month, and by 3.3 percent on an annual basis.
“Consumers see widespread price easing as the economy slows and opens up a small margin of slack in the labor market,” said Bill Adams, chief economist at Comerica Bank in Dallas.
The CPI report is one of two reports ahead of the Federal Reserve’s September 19-20 policy meeting. Financial markets overwhelmingly expect the central bank to leave interest rates unchanged at that meeting, according to CME Group’s FedWatch tool. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points to the current range of 5.25%-5.50%.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices fell.
Rental costs remain high
Excluding food and energy, the CPI rose 0.2% in July, matching the rise in June. Core inflation was held back by a 0.3% decline in commodity prices, which followed a 0.1% decline in June. The contraction in commodities was driven by used cars and trucks, whose prices fell 1.3%. There has also been a decline in the prices of new cars and home furnishings.
But services inflation held steady, rising 0.3% for the third month in a row. Services have been raised due to higher rental costs. Owners’ equivalent rent (OER), a measure of the amount homeowners will pay for rent or earn from renting their properties, rose 0.5% after rising 0.4% in June.
Independent measures have shown that rental costs are on a downward trend as more apartment buildings come onto the market. Rental actions in the CPI tend to lag independent measures by several months. The annual increase in rents slowed to 7.7% in July after exceeding 8.1% in March.
“Housing inflation will gain momentum in the coming months,” said Lydia Bousseur, chief economist at EY-Parthenon in New York.
There have also been increases in vehicle insurance, education and entertainment costs. But airline ticket prices fell 8.1%, falling for the fourth month in a row. Hotel and motel rooms were cheaper last month.
In the twelve months through July, the core CPI rose 4.7%. This was the smallest year-over-year advance since October 2021 and followed a 4.8% rise in June. Core personal consumption expenditures rose at an annualized rate of 3.1% in the past three months, the slowest pace since September 2021, after rising 4.1% in June.
But the economy is not out of the woods yet. Although the job market has slowed, conditions remain tight, keeping wages high and driving strong economic growth. Economists have warned that a wave of strikes, heatwaves across the country and the ongoing Russia-Ukraine war could add to inflation pressures.
Cooling down inflation also means improving household purchasing power, which supports demand. Real average hourly earnings for all employees increased 0.3% in July.
“This report does not yet guarantee that we have seen the last price increase,” said Richard de Chazal, macro analyst at William Blair in London.
In another report Thursday, the Labor Department said initial claims for state unemployment benefits increased by 21,000 to a seasonally adjusted 248,000 for the week ending Aug. 5, beating economists’ expectations for a reading of 230,000.
The larger-than-expected rise was driven by a big jump in filings in Ohio, a state that previously had problems with fraudulent applications. Economists also cited the collapse of yellow trucking as a factor.
The claims report showed that the number of people receiving benefits after an initial week from Help, a proxy for employment, fell by 8,000 to 1.684 million during the week ending July 29. Some laid-off workers experience short periods of unemployment.
(Reporting by Lucia Mutecani) Editing by Paul Simao
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