Inflation Slows as Economy Cools, Offering a Reprieve, But for how Long?

The Consumer Price Index climbed 8.5 percent in July, a bigger slowdown than expected, but inflation may remain uncomfortably high for some time.

Inflation cooled in July as gas prices and airfares fell, a welcome reprieve for consumers and economic policymakers but not yet a conclusive sign that price increases are turning a corner.

The Consumer Price Index climbed 8.5 percent in the year through July, compared with 9.1 percent the prior month, a bigger slowdown than economists had projected. After stripping out food and fuel costs to get a sense of underlying price pressures, prices climbed by 5.9 percent through July, matching the previous reading.

• On a monthly basis, the price index did not move at all in July. That’s because fuel prices, airfares, and used cars declined in price, offsetting increases in rent and food costs.

• Core inflation was also slower than economists had expected on a monthly basis, climbing by 0.3 percent. In June, that figure was 0.7 percent.

• Today’s report is probably welcome news at the White House and the Federal Reserve, both of which have been waiting for inflation to decelerate.

• But it’s easy to overstate how much July’s slowdown matters. Inflation is still abnormally high. The decline is owed in large part to gas prices, and they can always jump again.

• There are some real reasons to believe inflation will slow in the months ahead: Supply chain pressures, for instance, show signs of easing.

• But there are also reasons to worry. Wage growth remains rapid. And housing costs, particularly rents, continue to climb, which could keep inflation high for some time.

Consumer Price Index inflation cooled meaningfully in July as gas prices declined, which is good news for the Federal Reserve, though not yet enough for policymakers to conclude that America is through the worst of its burst of rapid price increases.

While costs finally stopped increasing at an accelerating rate, they are still climbing at an unusually rapid clip, making everyday life expensive for consumers. And a big chunk of the pullback in July came from dropping gas prices, as the average cost of a gallon of fuel began to fall back toward $4 after peaking at $5 in June.

Fuel costs are notoriously volatile, and with Russia’s invasion of Ukraine injecting heightened geopolitical tensions, officials are unlikely to stake victory on a slowdown that could quickly reverse itself. That said, the report contained other good news: Airfares came down in price, which was expected, but so did the cost of apparel, hotel rooms used cars. The slowdown in core prices, which strip out volatile food and fuel costs to give a sense of the underlying trend, was more pronounced than economists had expected.

Despite all those positive developments, costs continue to climb rapidly across many goods and services. Rapidly rising rents are likely to particularly stick out to the Fed, because they make up a big chunk of overall inflation.

The big question on Wall Street is what the new data will mean for the Fed’s policy path ahead — and investors on Wednesday interpreted the fresh data as likely to allow the central bank to slow down its rapid rate increases.

The Fed raised interest rates by three-quarters of a percentage point in both June and July, and officials have signaled that another one of those abnormally large increases should be up for debate at their upcoming meeting on Sept. 20-21. But investors are betting that slower inflation and moderating inflation expectations could shore up support for a smaller move.

Still, Fed officials have warned against reacting too much to one data point.

“It can’t just be a one month. Oil prices went down in July; that’ll feed through to the July inflation report, but there’s a lot of risk that oil prices will go up in the fall,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said during a recent appearance. It would be a mistake to “cry victory too early.”

— Jeanna Smialek