Inflation ticked higher in July, marking the first increase in the headline reading in over a year, suggesting that the Federal Reserve’s battle with inflation is still ongoing.
The Consumer Price Index (CPI), which measures the price fluctuations of a broad basket of goods and services in the U.S., rose 3.2% year-over-year in July before seasonal adjustment, beating consensus estimates of 3.3% and marking the first 12-month increase since July 2022, the U.S. Bureau of Labor Statistics (BLS) reported Thursday.
On a month-over-month basis, U.S. inflation rose 0.2% in July, the same seasonally adjusted increase as in June, the Labor Department said.
The largest monthly contributor to inflation came from the shelter index, which accounted for over 90% of the increase. The index for motor vehicle insurance (+2%) also contributed over the month.
The indexes for airline fares (-8.1%), used cars and trucks (-1.3%), medical care (-0.2%), and communication (-0.1%) were among those that decreased over the month.
The indexes with the most price fluctuations over the past 12 months include food away from home (+7.1%), shelter (+7.7%), and transportation (+9%). Each index relating to energy saw price decreases over the year, with gasoline dropping (-19.9%), energy commodities (-20.3%), and fuel oil (-26.5%).
Core CPI, which excludes the volatile food and energy components of consumer spending, rose 4.7% in July from a year earlier, coming in slightly below both the 4.8% reading in June and the consensus expectation for the month.
With core inflation trending lower, the Federal Reserve may need to consider altering its monetary policy approach to focus more on hawkish rhetoric and less on further interest rate hikes, according to PNC Senior Economist Kurt Rankin.
“This approach can make clear that the Fed will not allow inflation to reignite and that policy will remain restrictive in the face of strong consumer demand and wage growth,” Rankin told The Dallas Express in an email, adding that previous policy action “appears to be bearing fruit.”
The Federal Reserve has approved 11 rate hikes since its tightening cycle began in March 2022. In July, the U.S. Central Bank approved a 25-basis-point increase, bringing the Fed’s benchmark interest rate between 5.25% and 5.5%.
Fed members are scheduled to convene for their next policy meeting in late September, in which policymakers will decide whether to hold interest rates steady or to approve a twelfth rate increase. Fed futures as of August 10 are pricing in a roughly 10% probability of a quarter-percentage-point increase and a 90% chance that interest rates will remain unchanged.
According to the Fed’s Summary of Economic Projections, or “dot plot,” published in June, participants project a Fed funds rate of 5.5% to 5.75% by the end of 2023.
This means policymakers are likely to approve one last 0.25% rate hike at either the two-day meeting in November or the one in December. Fed futures are not currently pricing in a rate increase for September.
Despite printing a higher headline reading in July, inflation appears to be much closer to reaching the Fed’s 2% target than it is to rebounding back to the previous highs from last summer, suggested Rankin.
“Although this result is up slightly on a year-ago basis versus the June result, it represents a deceleration from an on-the-ground, current conditions perspective,” he told The Dallas Express.
“There remains a current wave of higher energy prices and continued strong wage growth that will keep the threat of inflation from fully abating, but signs are so far pointing to the worst of that threat failing to materialize as the summer months’ spending season hits full swing,” Rankin explained.
“We can feel confident that inflation is moving in the right direction, but I don’t think we should be overly confident,” said Mark Zandi, chief economist at Moody’s Analytics, CNBC reported.
CPI data for August is scheduled to be released on September 13, 2023.
