Year-over-year inflation reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the Federal Reserve for an interest rate cut in September. Wednesday's report from the Labor Department showed that consumer prices rose just 0.2% from June to July after dropping slightly the previous month for the first time in four years. Measured from a year earlier, prices rose 2.9%, down from 3% in June. It is the mildest year-over-year inflation figure since March 2021. Inflation peaked two years ago at 9.1%, the highest level in four decades.
The government said nearly all the increase last month reflected higher rental prices and housing costs, a trend that, according to real-time data, is easing. Excluding the volatile food and energy categories, so-called core prices climbed 0.2% from June to July, after a 0.1% increase the previous month. Compared to a year ago, core inflation rose 3.2%, down from 3.3% in June, the lowest since April 2021. Core prices are closely watched by economists because it typically provides a better read of where inflation is headed, reports the AP.
Fed Chair Jerome Powell has said he is seeking additional evidence of slowing inflation before the Fed begins cutting its key interest rate. Economists widely expect the Fed's first rate cut to occur in mid-September. At a news conference last month, Powell said that cooler inflation data this spring had strengthened the Fed's confidence that price increases are falling back to a 2% annual pace. Another inflation report will be issued next month before the Fed's Sept. 17-18 meeting, with economists expecting that report to also show that price increases remained mostly tame.
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As inflation continues to decline, the Fed is paying increasingly close attention to the job market. The central bank's goals, as defined by Congress, are to keep prices stable and support maximum employment. This month, the government reported that hiring slowed much more than expected in July and that the unemployment rate rose for a fourth straight month, though to a still-low 4.3%. On Thursday, the government will release its latest data on retail sales, which are expected to show that consumers increased their spending modestly in July. As long as shoppers are willing to spend, businesses are likely to hold onto their workers and may even add staff.
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