Inflation for July 2024 is presented in a single chart.

• In July 2024, the U.S. Bureau of Labor Statistics reported that the consumer price index increased by 2.9% compared to the same month the previous year.
• That was the lowest reading since March 2021.
• Inflation for consumer staples has eased considerably, economists said.

In July, inflation decreased due to reduced pressure on prices for consumer goods like food, energy, and cars, as well as physical goods.

The U.S. Department of Labor reported on Wednesday that the consumer price index, a crucial inflation indicator, increased by 2.9% in July compared to the same month last year. This figure is lower than the 3% recorded in June and marks the lowest reading since March 2021.

The CPI measures the rate of price change in the U.S. economy, including items such as fruits and vegetables, haircuts, concert tickets, and household appliances.

Mark Zandi, Moody's chief economist, stated that the CPI report was accurate.

Zandi stated that the growth of inflation for groceries is "very slow."

The good news about the availability of fresh produce is particularly encouraging for lower income consumers who are the most affected.

Inflation guides Fed interest rate policy

The July inflation rate has decreased significantly from the 9.1% peak recorded in mid-2022, which was the highest level since 1981.

It's also nearing policymakers' long-term target, around 2%.

According to Joe Seydl, senior markets economist at J.P. Morgan Private Bank, we believe we have passed the worst of inflation from our perspective.

The Federal Reserve employs inflation statistics to inform its interest rate strategy. In the midst of the Covid-19 pandemic, the Fed increased rates to their highest level in 23 years, resulting in higher borrowing costs for consumers and businesses, as the central bank sought to curb inflation.

Some investors are concerned that recent labor market data may indicate a U.S. recession is imminent, but economists believe these fears are exaggerated, at least temporarily.

The likelihood of Fed officials cutting interest rates at their next meeting in September is high due to the easing of inflation and a cooler labor market, economists predict. This would lower borrowing costs, thereby boosting the economy.

According to Paul Ashworth, chief North America economist at Capital Economics, the CPI report provides additional evidence supporting a 0.25 percentage point September rate cut.

Housing is a stumbling block

The major obstacle to lowering inflation, according to economists, is the housing market.

The largest component of the CPI significantly influences inflation readings.

The BLS announced on Wednesday that the shelter index has increased by 5.1% since July 2023, accounting for more than 70% of the annual increase in "core" CPI. Core CPI, which is preferred by economists, removes food and energy costs, which can be unpredictable.

In July, the BLS reported that shelter inflation increased from 0.2% in June to 0.4%.

The government's measurement of housing inflation causes it to move slowly, which masks positive news in the real-time rental market, where inflation has remained flat for two years, according to Zandi.

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Zandi stated that, excluding shelter, "we're at the Fed's target and then some."

In his view, the fight against inflation was a success.

In July, the Consumer Price Index (CPI) increased by 1.7%, which was below the Federal Reserve's (Fed) annual target.

Market rents are expected to continue to decrease, causing shelter CPI inflation to slow down gradually, according to economists.

Other 'notable' categories

According to the BLS, notable increases in motor vehicle insurance, medical care, personal care, and recreation were observed over the past year.

The percentage increase in prices for those categories is 18.6%, 3.2%, 3.4%, and 1.4%, respectively.

The increase in car prices a few years ago is likely driving up car insurance premiums and repair costs, as it is more expensive to insure and repair more expensive vehicles, according to economists.

The decline in car prices should lead to a decrease in insurance inflation, according to experts. Over the past year, new vehicle prices have fallen by 1%, while used car and truck prices have decreased by almost 11%.

The rise in egg prices in 2022, caused by a bird flu outbreak, has been followed by another increase, with prices up 19% from the previous year.

While other food categories such as bacon and crackers experienced an increase of 8.5% and 3% respectively over the past year, their prices decreased by 8.5% and 3% in July, indicating a possibility of further declines.

In July 2022, the annual grocery inflation rate was 1.1%, lower than the average of 11.4% for the year, which was the highest since 1979.

How supply and demand impacted inflation

As the U.S. economy reopened in 2021, the cost of physical goods increased due to supply chain disruptions caused by the Covid-19 pandemic. At the same time, Americans shifted their spending patterns, allocating more funds towards their homes and less towards services such as dining out and entertainment.

While the goods inflation has normalized, the services sector remains a concern, according to economists.

The job market is slacker and wage growth is declining, which should ease inflation in services, which is generally more sensitive to labor costs, economists said.

Reducing demand through high interest rates has helped decrease overall inflation, according to Seydl.