US inflation slows from 40-year high but remains high

Falling gasoline prices gave Americans a slight respite from the pain of high inflation last month, though overall price increases slowed only modestly from a four-decade high hit in June.

Consumer prices rose 8.5% in July compared to a year earlier, the government said on Wednesday, down from the 9.1% year-on-year jump in June. On a monthly basis, prices were unchanged from June to July, the smallest increase in more than two years.

In addition to gasoline, among the consumer purchases whose prices fell from June to July are airfares, which plummeted almost 8%. Hotel room costs fell 2.7%, used car prices 0.4%. Such items had previously generated some of the largest price jumps in the economy.

Those drops lowered so-called core inflation, a measure that excludes volatile food and energy categories to provide a clearer picture of core inflation. Core prices rose just 0.3% from June, the smallest monthly increase since April. And compared to a year ago, core inflation rose to 5.9% in July, the same year-over-year increase as in June.

Wednesday’s report raised hopes that a modest slowdown in inflation could allow the Federal Reserve to raise short-term interest rates less than expected when it meets in late September. Many economists had forecast that it would raise its benchmark rate by three-quarters of a point for the third time in a row. But financial markets are now predicting that a half-point rise is more likely.

The prospect of slower inflation and smaller rate hikes from the Fed buoyed the stock market as trading began on Wednesday, with futures pointing to a solid rise in the S&P 500 index.

Still, underlying prices have slowed in the recent past only to pick up again in subsequent months. And many items continue to get more expensive. Food prices continued to rise in July, for example, rising 13% from a year earlier, the biggest increase since 1979. Rent, health care and furniture costs also rose at high rates.

Average paychecks are rising faster than they have in decades, but not fast enough to keep up with higher costs.

President Joe Biden has pointed to declining gasoline prices as a sign that his policies, including large releases of oil from the nation’s strategic reserve, are helping ease higher costs that have hit America’s finances. Americans, particularly for low-income Americans and African Americans and Hispanics. homes

Still, Republicans are emphasizing the persistence of high inflation as a major issue in the midterm congressional elections, and polls show high prices have slashed Biden’s approval ratings.

On Friday, the House is set to give final congressional approval to a revived tax and climate package pushed by Biden and Democratic lawmakers. Economists say the measure, which its proponents have dubbed the Inflation Reduction Act, will have little effect on inflation for years to come.

While there are signs that inflation may ease in the coming months, it is likely to remain well above the Fed’s 2% annual target well into next year or even 2024. Chairman Jerome Powell has said that the Fed needs to see a series of decreasing monthly rates. core inflation readings before it considered pausing its rate hikes. The Fed has raised its benchmark short-term rate at its last four rate-setting meetings, including a three-quarter point increase in both June and July, the first increases this large since 1994.

A blockbuster jobs report for July the government issued on Friday, with 528,000 jobs added, wages on the rise and an unemployment rate matching a half-century low of 3.5%, solidified expectations that the Fed will announce another three-quarters point increase when it meets next in September. Strong hiring tends to boost inflation because it gives Americans more collective purchasing power.

One positive sign, however, is that Americans’ expectations of future inflation have fallen, according to a survey by the Federal Reserve Bank of New York, likely reflecting the drop in gasoline prices that is highly visible to the most consumers.

Inflation expectations can be self-fulfilling: If people believe that inflation will stay high or get worse, they are likely to take action, such as demanding higher wages, which can drive prices up in a self-perpetuating cycle. Companies then often raise prices to offset their higher labor costs. But the New York Fed survey found that Americans expect lower inflation one, three and five years from now than they did a month ago.

Supply chain tangles are also loosening, with fewer ships moored in Southern California ports and shipping costs falling. The prices of raw materials such as corn, wheat and copper have fallen sharply.

However, in categories where price changes are more stringent, such as rentals, costs continue to rise. A third of Americans rent their homes, and higher rental costs are leaving many with less money to spend on other items.

Bank of America data, based on its customer accounts, shows that rent increases have fallen particularly among younger Americans. Median rent payments for so-called Generation Z renters (those born after 1996) increased 16% in July from a year earlier, while for baby boomers the increase was just 3%.

Stubborn inflation is not just an American phenomenon. Prices have skyrocketed in the UK, Europe and in less developed countries like Argentina.

In the UK, inflation soared 9.4% in June from a year earlier, a four-decade high. In the 19 countries that use the euro currency, it reached 8.9% in June from a year earlier, the highest since euro recording began.

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