Consumer price growth in July slowed to its lowest level of the post-pandemic period, a sign that the surging inflation that has gripped the U.S. economy is finally ebbing.
On a 12-month basis, the consumer price index ticked down to 2.9%, down from 3% in June. Month over month, it rose 0.2% after falling 0.1%.
The latest reading adds to gathering evidence that the strong price growth consumers have suffered since the start of the pandemic is abating.
On Monday, the New York Federal Reserve reported that consumers’ three-year inflation outlook hit a record low. And a measure of wholesale price increases came in lower than expected Tuesday. Many companies are now lowering prices or offering discounts in response to consumers who have grown increasingly frugal.
“We’re seeing lower average selling prices … right now because customers continue to trade down on price when they can,” Amazon CEO Andrew Jassy said on the company’s earnings call this month. Analysts said a spate of discounts helped juice demand during the e-commerce giant’s Prime Day sales event last month.
Meanwhile, McDonald’s plans to extend a recent $5 meal deal that diners have embraced after the fast-food chain saw its menu price hikes dent foot traffic. Even airlines and hotels are slashing rates during the busy summer season, giving last-minute vacationers some of the best bargains in years.
Annual price increases for some purchases have already dipped below 2%, CPI data show, including gas and groceries. And most of the overall increase that made up the 22% gain in pandemic-era inflation occurred from 2020 to 2022; last year, the total CPI increased by roughly 3.5%.
Many economists say the Federal Reserve’s decision to raise interest rates starting in spring 2022 helped curb the upswing. By making it more expensive to borrow, the central bank sought to slow demand for goods and services, making it harder for businesses to raise prices.
It is likely that a cooling labor market has also been weighing on consumers. The BLS reported this month that the unemployment rate climbed unexpectedly to 4.3% — still historically low but a level not seen since the summer of 2017.
“Amid increasingly worrisome conditions in the labor market, we expect the Fed to consider inflation is close enough to its target and embark on a rate cutting cycle at its next meeting,” economists at Wells Fargo wrote in a research note this month.
And many other parts of the economy, including housing costs, child care and insurance, continue to soar higher. While only housing costs account for a significant weight for the overall CPI — and, indeed, are largely responsible for keeping it above 2% — families in the U.S. continue to struggle to maintain their desired standard of living.
A recent Gallup Poll found 46% of respondents describing current U.S. economic conditions as “poor” — the prevailing response for the 29th straight month. And the New York Fed’s survey has found the share of respondents describing their financial situation as “somewhat better off” has declined for eight straight months.
A confluence of factors, including ongoing shortages in key job roles, changes in consumer behavior and even climate change, have all contributed to elevated price growth in affected categories.
Yet even there, there are already signs of easing thanks to the resetting of annual increases for insurance premiums, lower commodities prices and the weakening jobs market.
It is that last factor that the Federal Reserve is keenly focused on. While the central bank has signaled it is likely to lower interest rates at its next meeting in September, if job losses begin to mount rapidly, it may have to act more aggressively.
“Federal Reserve officials have reason to be increasingly concerned about softening of the job market, the other part of its dual mandate of stable prices and maximum employment,” Bankrate Senior Economic Analyst Mark Hamrick said in a release.
“If and when a recession materializes, layoffs increase and more individuals and households suffer damaging interruptions in employment and incomes,” he said.