Inflation stayed elevated but eased off historically high levels in July, raising hopes that a relentless surge in prices may have peaked.
Consumer prices increased 8.5% from a year ago, down from a 9.1% annual rise – a 40-year high – in June, according to the Labor Department’s Consumer Price Index. Gasoline prices fell but food and rent continued to march higher.
Economists surveyed by Bloomberg had estimated yearly inflation would fall to 8.7%.
On a monthly basis, consumer prices were unchanged, compared to a 1.3% rise in June.
Core prices, which exclude volatile food and energy items and generally provide a better gauge of future trends, increased 0.3% in July following a 0.7% rise the prior month. That held the annual increase at 5.9% after three straight monthly declines.
Stocks shot higher. The Dow Jones Industrial Average leaped 521 points in mid-morning trading and the S&P 500 rose 1.75%. Investors hope the better-than-expected report will lead the Federal Reserve to raise its key interest rate by a half percentage point next month to fight inflation instead of a third straight three-quarters point move.
Gas prices, which led the inflation spike, are finally tumbling on fears that a global recession will squash demand. Pump prices fell 7.7% from the prior month but are still up 44% annually. Unleaded regular averaged $4.03 Tuesday, down from $4.70 a month ago. Further declines are likely coming, Goldman Sachs says, citing futures markets.
Grocery prices, though, rose by 1.3% from June and are up 13.1% over the past 12 months. Recent declines in the price of wheat, corn and other commodities amid the recession concerns are expected to push down food costs. But it could take some time for shoppers to see it in their grocery bills, says Barclays economist Pooja Sriram.
Meanwhile, she says, Russia’s war in Ukraine is sending food prices higher by disrupting fertilizer shipments and driving up the commodity’s cost for farmers.
In July, breakfast cereal prices rose 2% from the prior month and 16.4% from a year ago. Chicken costs increased by 1.4% and 17.6% yearly. And eggs shot up 4.3% and 38% from a year ago.
There were some positive signs. Ham prices fell 1%. And beef and veal prices were unchanged following a 2.3% drop in June.
Restaurant tabs, however, kept climbing, rising 0.7%, and the trend is starting to affect higher-income households. Earlier this year, inflation was mostly squeezing Americans earning less than $50,000, says John Leer, chief economist of Morning Consult, a research firm.
With the pandemic becoming a less virulent public health threat, Jim Gomes of Palm Desert, California, and his wife, Jennifer, have been dining out about six times a month since spring. But the bill for dinner at a nice restaurant has shot up to about $180 from $120 a year ago, he says.
So the couple has cut back by sharing an entrée and skipping dessert.
“If we get two entrees at $40 a piece, it gets a little crazy,” says Gomes, 65, a retired finance executive.
Other price trends were mixed last month. Rent edged up 0.4% monthly and 6.3% over the past year as landlords offset a surge in housing sale prices. Medical care services increased 0.4% and 5.1% yearly. And new vehicle costs advanced 0.6% and 10.4% annually.
But used car prices dropped 0.4% and apparel prices dipped 0.1%. Summer travelers got more good news as airline fares declined for the second straight month, sliding 7.8%, though prices are still up 27.7% from a year ago. And hotel rates were down 2.7% after a 2.8% drop the previous month.
Fed Chair Jerome Powell has said the central bank needs to see “clear and compelling evidence” that inflation is falling to dial back its aggressive rate-hike strategy.
“This is not yet the meaningful decline in inflation the Fed is looking for,” says economist Paul Ashworth of Capital Economics. “But it is a start and we expect to see broader signs of easing price pressures over the next few months.”
Ashworth expects the Fed to lift its benchmark rate by a half point next month. But economist Rubeela Farooqi of High Frequency Economics predicts a three-quarters point increase. She notes the Fed will have to weigh the latest inflation data against a report last week that showed the economy added a booming 528,000 jobs as annual wage growth ticked up to 5.2%, further stoking price pressures.
There are signs inflation will pull back further. Consumer expectations of inflation over the longer term – which affect actual price increases — fell sharply in July, according to a survey by the Federal Reserve Bank of New York out this week.
And besides the drop-off in commodity prices, supply chain troubles triggered by the pandemic are abating and retailers’ swollen inventories are sparking big discounts for shoppers.
Barclays now expects overall inflation to end the year at 5.8%, below its previous 6.1% estimate. The firm predicts core price increases will fall to 5.3% by December. Both would still be well above the Fed’s 2% target.
Contributing: Medora Lee
