The latest data on inflation, closely monitored by the Federal Reserve, indicates a slowdown in price increases. This development increases the likelihood that the Fed will not raise interest rates during its upcoming meeting in late September. The Commerce Department’s report showed a modest 0.2% increase in prices from June to July, marking the third consecutive month of low inflation. While prices rose 3.3% in July compared to the previous year, this figure is significantly lower than the peak of 7% reached a year ago. The decrease can be attributed to smaller price increases recorded in the same period last year.
Jamie Cox, managing partner for Harris Financial Group, stated that these data confirm the market’s understanding that consumer strength remains robust due to a resilient labor market, while inflation continues to decline despite a slight increase in energy prices over the summer.
The report also highlighted specific items of inflation. Groceries saw a minimal increase of 0.2% from June to July but have risen by 3.5% in the past year. Gas prices increased by 0.3% in July, although they remain 22.3% lower than they were a year ago. New vehicle prices slightly decreased by 0.1%, but they are still 3.6% higher than in July of the previous year. Used car prices fell by 1.4% from June to July and are down by 5.5% compared to the same period last year.
These recent reports align with other indicators suggesting a slowing economy and job market, which can help alleviate inflationary pressures. The decline in job openings and fewer individuals leaving their jobs for better opportunities reduce the need for companies to raise wages, ultimately curbing inflationary effects resulting from increased labor costs.
Excluding the volatile food and energy prices, “core” inflation rose by only 0.2% from June to July, mirroring the increase observed from May to June. Compared to the previous year, core prices rose by 4.2%, a slight increase from the previous month’s 4.1%. Policymakers at the Federal Reserve closely monitor core prices as an indicator of future inflation trends.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, remarked that it is increasingly difficult to dismiss the improvement in inflation numbers as mere noise. He pointed out that annualized core inflation in the past three months has slowed down significantly, the slowest pace since March 2021.
Based on these developments, economists and traders on Wall Street believe that the Federal Reserve will leave interest rates unchanged in their upcoming September meeting. If inflation and economic conditions continue to moderate, it is possible that the Fed will maintain rates during their subsequent meeting in November as well. This would signify that the July rate increase was the last one for the foreseeable future.
Although the year-over-year inflation rates have increased, some economists stress that monthly and quarterly data hold more significance as they provide more timely indicators. Federal Reserve Chair Jerome Powell emphasized the need for caution and vigilance in assessing inflation levels in his speech at the annual conference of central bankers. Powell acknowledged that two months of positive data are just the beginning and further sustained decreases in inflation need to occur before confidence in the downward trajectory can be established.
In Europe, inflation has mostly remained stable, mirroring the situation in the United States. The European Central Bank faces similar decisions about raising its key interest rate in their next meeting in September. Spending in the United States surged in July, with consumer spending rising by 0.8% compared to the previous month, indicating strong economic growth in the July-September quarter. However, the Federal Reserve aims to moderate spending to control inflation, as excessive acceleration could prompt further rate increases. At the same time, the central bank aims to avoid a severe economic downturn.
Powell’s speech acknowledged the complex dynamics surrounding the economy and inflation, emphasizing the Federal Reserve’s cautious approach in making future decisions. In Europe, the consumer price index remained steady in July, with core inflation slightly easing.
In terms of consumer spending, data from the Bank of America Institute showed an increase in July, attributed to the July 4th holiday and online spending events like Amazon’s “prime” shopping day. Entertainment spending also surged, influenced by the popularity of movie releases. Major retailers, such as Macy’s, Foot Locker, and Kohl’s, reported sales declines, while discount retailers like Walmart, TJ Maxx, and Dollar Tree experienced sales growth. This suggests that lower- and middle-income consumers are seeking bargains and prioritizing essential purchases amid inflation and higher borrowing costs.
Economists note that last month’s increase in consumer spending was driven by temporary factors that are unlikely to be repeated. Increased utility spending due to hot weather and back-to-school shopping contributed to the surge.
Overall, the inflation gauge monitored by the Federal Reserve indicates a cooling of price increases. The Fed’s upcoming meeting in September is expected to keep interest rates unchanged, and future rate hikes will depend on the trajectory of inflation and economic conditions.
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