Consumers are getting some relief from higher prices as core inflation, which excludes food and energy, continues to show signs of cooling — an encouraging sign for the U.S. economy, according to economists.
The Department of Labor’s report on Thursday showed the consumer price index rose 0.2% in July, in line with expectations, and 3.2% in the past year compared to 3% in June. Despite that slight uptick, economists say it’s still good news for the economy and consumers.
This is the second-month core inflation has reached pre-pandemic levels, according to an analysis of Department of Labor data by the Roosevelt Institute.
“We now have two straight months of low, honestly, quite normal levels of inflation,” Kitty Richards, acting executive director of the progressive think tank Groundwork Collaborative, told States Newsroom. “That’s a huge drop from last summer’s peak. And that is something we should be celebrating, especially given that it has happened in the context of growing real wages and a job market that is still delivering for American workers. I’m really glad to see that in the inflation report.”
Food prices increased 0.2% from June to July and 4.9% from July 2022. However, egg prices, which families have complained about at the checkout line, are falling. Milk prices have also continued to decline. Frozen fish and other seafood prices also fell in July after increasing slightly in June.
David Ortega, a food economist who is an associate professor at Michigan State University, said food price inflation is starting to moderate.
“A 3.6% increase in grocery prices is a welcome relief from what we saw last year. We were talking about double-digit increases, year-over-year, for grocery prices,” he said. “They peaked in August [of 2022]. There are signs that things are moderating, and they’re improving.”
But it’s still important to consider that these promising changes are not necessarily affecting the average American’s experience of prices at the supermarket in a big way, he cautioned.
“If you talk to consumers, people say, ‘Things are still expensive at the grocery store.’ And that’s correct because inflation is the rate of increase in prices over some time,” he said. “Just because the rate of increase starts to come down, it doesn’t mean that prices are coming down or things are necessarily getting cheaper. It just means that they’re not increasing in price as quickly.”
Ortega said some factors still adding inflationary pressures include climate change and Russia’s war in Ukraine.
“We’ve seen some of those factors start to improve and, in some cases, not be much of a problem like in the case of bird flu for egg prices. But we still have some factors that are adding inflationary pressures ….,” he said. “That’s why inflation has been very persistent. And there’s also a demand story that we’ve seen, especially in the data that we have for last year, that consumer spending on food has been pretty strong.”
Housing costs lagging
Thursday’s inflation numbers affect the Federal Reserve’s efforts to bring inflation down to its 2% target. In July, the Fed raised interest rates by 0.25% to the highest in 22 years.
Fed Chairman Jerome Powell said in a July press conference that the Fed was waiting to see whether the June CPI report, as well as other economic data, was a blip before deciding to pause raising interest rates. Fed meeting details show that officials wanted to see how interest rate hikes and the spring bank collapses were affecting the economy before making another policy decision.
Powell said the Fed would be watching this CPI report and the following one to see if there is a trend in the moderation of inflation as it considers its next decision.
“Between now and the September meeting, we get two more job reports, two more CPI reports …,” he said. “All that data I recited, we will look at all that and make that assessment then. We did have that one good reading, but it is just one reading, as everybody knows, and we’ve seen this in the data. Many forecasts call for inflation to remain low, but we don’t know until we see it in the data.”
Shelter also continues to have a significant effect on inflation. According to the U.S. Bureau of Labor Statistics, it made up 90% of the increase this month. But there is additional context to consider for shelter data since it is a lagging indicator, Richards said.
“Affordability of housing is a huge concern for Americans … The data is telling us shelter costs in the CPI lag by up to a year, and market data, which is much more current, shows that housing costs have cooled dramatically since last summer,” she said. “…What that means is that inflation right now is lower than the CPI headline number.”
Richards said that because prices for all items without shelter have been only 1% for the past 12 months, the Fed may consider that data in September when it makes its next call on interest rates.
“That’s good news. But we also need to ask whether the Fed continuing to aggressively pursue a 2% CPI inflation target has a real risk of overshooting.”
There’s only so much effect the Fed can have on demand for food. However, Ortega said.
“The raising of interest rates has little effect on demand for food, especially at the grocery store because food is a necessity. … That may make it more difficult for people to go out and eat at restaurants or maybe not splurge as much when they go to the grocery store. But that will not significantly affect the overall prices and what we’re seeing with overall inflation.”
This article was initially published on MarylandMatters.org and is republished with permission.