Inflation in the United States rose in July after 12 straight months of declines, boosted by costlier housing. But excluding volatile food and energy prices, so-called core inflation rose just 0.2% from June, matching the smallest monthly increase in nearly two years, per the AP. The inflation figure the government reported Thursday showed that consumer prices increased 3.2% from a year earlier, up from a 3% annual rise in June, which was the lowest rate in more than two years. The July inflation figure remained far below last year's peak of 9.1%, though still above the Federal Reserve's 2% target.
The Fed, economists, and investors, however, pay particular attention to the core inflation figures for signs of where inflationary pressures might be headed. Thursday's data will be among key barometers the Fed will weigh in deciding whether to continue raising interest rates. In its drive to tame inflation, the Fed has raised its benchmark rate 11 times since March 2022, to a 22-year high. A jump in energy prices was likely a major contributor to higher inflation in July. Gasoline prices have surged nearly 30 cents over the past month to a national average of $3.83 a gallon, according to AAA. Much of the inflationary surge that began in 2021 was also caused by clogged supply chains: Ports, factories, and freight yards were overwhelmed by the explosive economic rebound from the 2020 pandemic recession.
The result was delays, parts shortages, and higher prices. But supply-chain backlogs have eased in the past year, sharply reducing upward pressure on goods prices. Prices of long-lasting manufactured goods actually dipped in June. Now, the Fed faces a daunting problem: persistent inflationary pressures in service businesses—restaurants, hotels, entertainment venues, and the like—where wages represent a substantial share of costs. Worker shortages have led many of these services companies to sharply raise pay. Another factor working against continued declines in year-over-year inflation rates is that prices soared in the first half of last year before slowing in the second half. Therefore, any price increase in July would have the effect of boosting the year-over-year inflation rate.
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Still, economists caution against reading too much into one month of numbers, with many of them expecting inflation to continue trending lower. Many economists and market analysts think the Fed's most recent rate hike in July will prove to be its last: Nearly 87% of traders expect no Fed hike next month, per the CME Group's FedWatch Tool. Fed officials will have plenty of data to absorb before deciding whether to continue raising rates. Thursday's report is the first of two CPI (Consumer Price Index) numbers the policymakers will see before their next meeting Sept. 19-20. In addition, their favored inflation gauge, called the Personal Consumption Expenditures Price Index, comes out on Aug. 31. And August jobs report is also will be released on Sept. 1.
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