US annual inflation falls to 3-year low, paving the way for Fed rate cuts | News, Sports, Jobs

James Pratt, head cashier at Phantom Fireworks in Hinsdale, NH, helps pack a customer's order on June 28. (AP Photo)

WASHINGTON — Year-over-year inflation hit its lowest level in more than three years in July, the latest sign that the worst price increase in four decades is easing and the Federal Reserve is eyeing a rate cut in September.

The Labor Department's report on Wednesday showed that consumer prices rose just 0.2% from June to July, after falling slightly the previous month for the first time in four years. On a year-on-year basis, prices rose 2.9%, up from 3% in June. It was the lowest year-on-year inflation rate since March 2021.

The ongoing inflation slowdown could affect the presidential election campaign, as former President Donald Trump has called rampant inflation a major failure of the Biden administration and its energy policy. Vice President Kamala Harris has announced that she will soon put forward new proposals to “reduce costs while strengthening the economy as a whole.”

The government said inflation in July was almost entirely due to higher rents and other housing costs. This trend is weakening, according to real-time data. As a result, housing costs are expected to rise more slowly in the coming months, contributing to lower inflation.

In July, food prices rose just 0.1 percent, just 1.1 percent above the year-ago figure. That's much slower growth than in previous years. Yet many Americans are still struggling with food prices, which are still 21 percent higher than they were three years ago, even though average wages have also risen sharply since then.

Gasoline prices were unchanged from June to July and have actually fallen 2.2% over the past year. Clothing prices also fell last month, remaining almost unchanged from 12 months earlier. Prices for new and used cars also fell in July. Used car prices, which had skyrocketed during the pandemic, have fallen nearly 11% over the past year.

Some food prices, including meat, fish and eggs, are still rising faster than before the pandemic. However, prices for dairy products and fruits and vegetables fell in July.

Wednesday's report shows that inflation is steadily moving closer to the Fed's 2 percent target – but not too quickly, which could indicate a weakening economy, said Tara Sinclair, an economist at George Washington University and former U.S. Treasury official.

“It is a reassuring report, both because it goes in the right direction and because it does not contain anything too dramatic,” said Sinclair. “It’s exactly what we wanted to see.”

For nearly a year now, the slowdown in inflation has been providing gradual relief to American consumers, who three years ago suffered from price increases, particularly for food, gasoline, rent and other essential goods. Inflation peaked two years ago at 9.1 percent, the highest level in four decades.

In July, so-called core prices (excluding volatile food and energy costs) rose a modest 0.2% from June, after rising 0.1% the previous month. And year-on-year, core inflation slowed to 3.2% from 3.3% – the lowest since April 2021. Core prices are closely watched by economists because they tend to provide a better indication of where inflation is headed.

Fed Chairman Jerome Powell has said he is looking for more evidence of easing inflation before the Fed begins cutting its benchmark interest rate. Economists generally expect the Fed's first rate cut to come in mid-September.

When the Federal Reserve lowers its benchmark interest rate, it tends to lower borrowing costs for consumers and businesses over time. Mortgage rates have already fallen in anticipation of the Fed's first rate cut.

Many companies have slowed their price increases as consumers become less willing to pay more. Mark Barrocas, CEO of SharkNinja, a small appliance maker in Needham, Massachusetts, said the company raised its prices by 5 to 7 percent in 2021 and 2022 but has not done so since.

Barrocas noted that people are becoming more demanding and expecting more from the products they buy, as prices are much higher than they were a few years ago.

“You really have to think very, very carefully about the long-term impact of price increases,” he said.

At a press conference last month, Powell said cooler inflation data this spring had boosted the Fed's confidence that price increases are declining to a 2% annual pace. Another inflation report will be released next month, ahead of the Fed's Sept. 17-18 meeting. Economists expect that report, too, will show that price increases have remained broadly moderate.

Inflation has eased sharply over the past two years as global supply chains have been repaired, a wave of housing construction has driven down rents in many major cities, and higher interest rates have slowed auto sales, forcing dealers to offer better deals to potential car buyers.

Consumers, especially those on low incomes, are also becoming more price-conscious and are foregoing high-priced products or turning to cheaper alternatives. This has forced many companies to curb their price increases or even offer lower prices.

Prices are still rising sharply for some services, such as auto insurance and health care. Auto insurance costs have soared as the value of new and used cars has risen sharply compared to three years ago. They rose 1.2 percent from June to July alone, defying expectations of a smaller increase.

However, once insurance companies raise their prices enough to cover the costs of more valuable cars, their prices are likely to rise more slowly.

As inflation continues to fall, the Fed is paying increasing attention to the labor 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 fell much more than expected in July and that the unemployment rate rose for the fourth month in a row, but still to a low 4.3%. The figures roiled financial markets and prompted many economists to revise upward their forecasts for rate cuts this year.

Most analysts now expect at least three interest rate cuts of a quarter of a percentage point each at the Fed meetings in September, November and December. The Fed's key interest rate is at a 23-year high of 5.3 percent.

Nevertheless, the increase in the unemployment rate is mainly due to the influx of job seekers, especially new immigrants who did not find work immediately and were therefore classified as unemployed. This is a much more positive reason for a higher unemployment rate than if it had been caused by an increase in layoffs. Job reduction measures remain low.

On Thursday, the government will release its latest retail sales data, which is expected to show that consumers increased their spending slightly in July. As long as shoppers are willing to spend, businesses are likely to retain their employees and may even hire additional staff.