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

Elise Lacroix, owner of Stop & Go in Brattleboro, Vermont, changes the oil on a vehicle in her shop on July 15, 2024. AP Photo

WASHINGTON (AP) — 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 plans a rate cut in September.

The Labor Department's report on Wednesday showed that consumer prices rose just 0.2 percent from June to July, after falling slightly the previous month. Compared to a year ago, prices rose 2.9 percent, after 3 percent in June. It was the smallest increase since March 2021.

The ongoing inflation slowdown could affect the presidential campaign, as former President Donald Trump has called runaway inflation a major failure of the Biden administration and its energy policy. Vice President Kamala Harris has said she will soon unveil new proposals to “reduce costs and also strengthen the economy overall.”

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.

The 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's a reassuring report, both because it's a step in the right direction and because it doesn't contain anything too dramatic,” Sinclair said. “It's exactly what we wanted to see.”

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.

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.

Even though inflation – the rate of price increases – continues to decline, many people are still struggling with everyday costs that are on average still about 20 percent higher than they were three years ago. And this despite the fact that average wages in the US have been higher than inflation for over a year.

Ariel Borchuk, who lives in New York City's Harlem neighborhood, complained that the government's inflation reports meant nothing to “ordinary people” like him.

“Everything,” he said, “is expensive. What more do you need to know?”

Borchuk, 48, works in the restaurant industry. He had just bought a $7.99 fried chicken sandwich at a grocery store on Manhattan's Upper East Side. He says he can't really afford it.

Borchuk said he cooks more at home, eats out less and buys his groceries more often at Costco, where he gets good deals.

Austan Goolsbee, president of the Federal Reserve's Chicago branch, said in an interview with the Associated Press on Wednesday that July data showed inflation was clearly on track to meet the central bank's 2% target. He also noted that there were signs the labor market was weakening, even as the Fed's benchmark interest rate remained at its highest in decades.

Goolsbee's comments suggested that he would support a series of interest rate cuts in the coming months.

At a White House event on Wednesday, President Joe Biden was asked whether the country had defeated inflation.

“Yes, yes, yes,” he said. “I told you we're going to have a soft landing,” he added, meaning an economy in which inflation is under control without a deep recession.

For nearly a year now, the cooling of inflation has been providing gradual relief to American consumers who suffered from price increases three years ago. 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, followed by further cuts in November and December. Investors expect at least one of those cuts to be half a percentage point, depending on future prices.

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. For some items, prices were recently reduced back to levels before the earlier increases.

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.