Inflation eases in July but remains near 40-year highs

Annual consumer inflation dipped to 8.5 percent in July after hitting a 40-year high of 9.1 percent in June as falling gas prices finally gave consumers a break at the pump.

The consumer price index (CPI) was unchanged on a monthly basis, the Department of Labor reported Wednesday. Dow Jones economists had been expecting an uptick of 0.2 percent in inflation from June to July.

It’s not clear whether the latest dip means the U.S. economy has finally broken the back of inflation or if the lull is only temporary. Inflation has been rising rapidly since the middle of 2020 but has seen a couple of quick dips during that period, notably from July to August in 2021 and from March to April of this year.

The latest numbers from the Department of Labor show that the index for energy in July was up 32.9 percent annually, falling from 41.6 percent in June. The food index was up 10.9 percent annually, rising from 10.4 percent in June. Grocery prices reflected in the food-at-home index rose to 13.1 percent annually, up nearly a percentage point from 12.2 percent last month.

July core inflation, which is all goods minus the particularly volatile categories of food and energy, stayed even at 5.9 percent, which analysts say bodes well for the overall economy and may indicate an inflection point, or a fundamental change in the trajectory of inflation.

However, food and energy price swings are the ones that consumers feel most directly, and economists Wednesday were paying close attention to food prices in particular.

“A key gauge to watch is the food price index,” Boston College economist Brian Bethune said in a statement. “Upstream prices for food commodities have declined sharply with the grain shipments out of the Ukraine; however, it may take a couple of months for the drop in grain prices to affect prices at the local grocery store. There has been a massive shift to discount grocery distributors which is not reflected in the cost of living.”

The gasoline index was up 44 percent since July of last year — a major increase but still a significant reduction from the 60 percent annual rise seen in June.

Gasoline prices at the pump have dropped by a full dollar since last month, according to auto group AAA. The national average for a gallon of gas is now $4.01, down from $5.01 in June, but still up from $3.18 a year ago.

The Federal Reserve has been hiking interest rates since March in an effort to tame inflation that the central bank and Treasury Department had initially described as “transitory.” Treasury Secretary Yellen said earlier this year that she’d been wrong about this characterization of inflation, which has proven to be a much more significant problem in the wake of global private-sector shutdowns caused by the pandemic.

Markets responded positively to news of the reprieve.

The Dow Jones Industrial Average index of major U.S. companies jumped by 1.3 percent, or more than 400 points, in the first minute or two of trading on Wednesday. The S&P 500 index jumped 1.6 percent, more than 69 points, and the Nasdaq rose more than 2.1 percent, or 263 points.

Ahead of the opening of markets on Wednesday, futures for the Dow Jones leapt 411 points, or 1.3 percent. Contracts for the S&P 500 jumped 1.7 percent, while Nasdaq 100 futures jumped 2.3 percent. 

A survey from insurance company Prudential released Wednesday found that consumers are still worried about a recession in the U.S. economy as the Fed continues to hike interest rates to stretch the purchasing power of the dollar.

“Most (74 percent) of Americans are concerned about the looming recession and are bracing for an economic downturn within the next two years. These concerns have been a primary driver among more than half (53 percent) of Americans who report worrying about money daily and are beginning to make big and small changes to cope,” the survey found.

Updated at 9:52 a.m.