Inflation picked up in July, breaking a 12-month streak of slowing consumer price increases and underscoring that the rest of the battle to tame a historic spike in consumer costs could be more challenging.
Last month, another decline in used car prices costs offset a further surge in rent.
What is the current inflation rate?
Consumer prices overall increased 3.2% from a year earlier, up from 3% in June, according to the Labor Department’s consumer price index. The rise in inflation was largely due to a technicality in the calculation of yearly price gains.
Is inflation going down?
The small uptick 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.
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On a monthly basis, prices rose a modest 0.2% following a similar increase in June.
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?
“Inflation is cooling, but the path down is still expected to be bumpy and littered with potholes,” says Diane Swonk, chief economist of KPMG Economics.
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 Fed 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.
Will rent go down in 2023?
The cost of housing again was the biggest driver of inflation, though the increases have slowed a bit. Rent picked up a solid 0.4% in July but that’s down from a flurry of stronger increases. Annually, rent eased to 8%. Economists expect rent increases to ease substantially, based on new leases, but that shift has been slow to filter through to existing leases.
Meanwhile, auto insurance costs are up 17.8% from a year ago, and car repair prices rose 12.7% annually.
More encouraging was a 1.3% drop in used car prices. They generally have been on a downward trend and costs are down 5.6% yearly after a sharp pandemic-related run-up. New car prices dipped 0.1% and largely have been stable in recent months.
Airline fares tumbled 8.1%, largely on lower jet fuel prices, and are down 18.6% yearly, though that trend is likely to reverse now that fuel costs are headed higher. Hotel rates dipped 0.3%. Furniture prices fell 2.8% from a year earlier.
Are food prices going to go down in 2023?
Grocery prices rose more sharply after a string of smaller increases or declines, climbing 0.3%. That still pushed down the yearly increase to 3.6%. The cost of commodities such as wheat and corn had been falling because of easing global demand.
Last month, the price of rice and bread both rose 0.9%, uncooked ground beef jumped 1.5% and cookies increased 0.8%.
But chicken and fish prices both slid 1.1%, bacon was down 0.7% and eggs declined 2.2%. That’s the fifth straight monthly decline for eggs after a string of sharp bird flu-related increases, and costs are now down 13.7% over the past year.
Restaurant prices, meanwhile, rose more modestly after several large increases tied in part to rapidly rising wages sparked by labor shortages. Costs to dine out are up 7.1% over the past year.
Will gas keep getting more expensive?
Gas prices edged up 0.2% in July and are down 19.9% from a year earlier. Pump prices are well off their $5 peak a year ago but are expected to move higher this year on a brighter global economic outlook. Nationally, regular unleaded gasoline averaged $3.82 a gallon Tuesday, up from $3.54 a month ago.
S&P 500
Stocks rose following the CPI report. The Dow Jones Industrial Average gained 0.96%, while the S&P 500 increased 0.81% and the NASDAQ climbed 1%.
Want to understand more about inflation and its impact on the economy? Read below:
How will inflation impact my Social Security?
Lower inflation typically means those receiving Social Security will see a smaller cost-of-living adjustment (COLA). But in July, The Senior Citizens League, a nonprofit seniors group, estimated that COLA would be 3% in 2024. While that’s below the forty-year high of 8.7% this year, it’s higher than an estimate made in June that forecast a 2.7% COLA bump next year.
Isn’t it fine that COLA is lower as long as inflation falls, too?
Not really. An ongoing poll by The Senior Citizens League of 2,275 respondents through June 6 found that older consumers were not seeing much improvement when it came to their household spending.
“While the rate of inflation has slowed, prices have remained high in certain essential categories of spending,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.
Retirees’ spending priorities are different than other consumers, with most of their cash going to housing, transportation, food, utilities and health care – which have been costing more in recent months even if the pace of increases in some categories has been slowing.
How is COLA calculated?
The Social Security Administration (SSA) looks at average annual upticks in the consumer price index for urban wage earners and clerical workers, or CPI-W, from July through September to determine its COLA for the year. For the most part, the CPI-W looks like the broad CPI that the Labor Department releases each month, but it is a bit different. In May for instance, the CPI rose 4.0%, while the CPI-W showed a bump of 3.6%.
The Seniors Citizens League uses the most current inflation data to keep a running estimate of what COLA might be in the next year.
Is CPI the only measure of inflation the Federal Reserve considers?
No. The Fed’s favored inflation metric is actually the Personal Consumption Expenditures price index (PCE) from the Bureau of Economic Analysis. PCE also is split into headline and core, but it assesses a different basket of goods and services and polls a larger group of consumers.
PCE looks at price changes for all direct and indirect consumer consumption, not just specifically what urban households are paying out of pocket like the CPI. For instance, CPI would only look at what urban households pay out of pocket for medical expenses, but PCE includes costs paid by employer-provided insurance, Medicare, and Medicaid.
PCE also factors in substitutions. “Thus, if the price of bread goes up, people buy less bread, and the PCE uses a new basket of goods that accounts for people buying less bread,” the Cleveland Fed said. “The CPI uses the same basket as before.”
What is the wage growth rate?
Average hourly earnings increased 14 cents in July to $33.74, maintaining the annual wage increase at 4.4%. Pay hikes were over 5% in 2022, so wage increases have been slowing but they are still higher than the 3.5% rise the Federal Reserve would like to see at the most as it tries to lower inflation.
Current unemployment rate
The U.S. continued to add more jobs in July, with the nation seeing 187,000 more positions despite steeper interest rates and inflation.
The jobless rate, determined by a different survey of households, ticked down slightly from 3.6% to 3.5%, according to the Labor Department.
When is the next Fed interest rate decision?
The Fed’s meeting schedule is:
◾ Sept. 19-20
◾ Oct. 31/Nov. 1
◾ Dec. 12-13
What the Fed rate increases mean to credit card rates
The interest rates banks charge on their credit cards are connected to the prime rate. That, in turn, is largely pegged to the Fed funds rate.
There were limits set by state law in the late ’70s and early ’80s largely keeping credit card lenders from implementing an interest rate higher than 18%. In the mid-90s, with the prime rate ranging from 8% to 9%, credit card rates hovered at 15.5% to 16%.
As of last month, when the prime rate climbed to 8.25%, the average interest rate for a new credit card increased from 14.6% in February 2022 to 24.2% as of mid-July, said LendingTree. That’s spiked monthly interest charges to $140 – roughly a $55 monthly increase – on the average American’s $6,965 credit card balance.
What’s the difference between CPI and PPI?
CPI gauges inflation as felt by consumers each day, while the PPI, or producer price index, measures the average shifts over time in the selling prices received by domestic producers for their output. PPI, often referred to as wholesale price inflation, is measured at an earlier stage of the production and marketing cycle and does tend to impact CPI, according to the Richmond Federal Reserve.
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%
- July 2023: 3.2%
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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