US inflation eases slightly in July on lower petrol prices

The US consumer price index (CPI) rose by 8.5 per cent year on year in July, a slower annual increase compared with June, as inflationary pressures eased on the back of lower petrol prices.

The CPI data released on Wednesday will raise hopes that the pace of price rises in the world’s largest economy has peaked and has started to decelerate, which will be of comfort to both the Federal Reserve and the administration of President Joe Biden.

According to the figures, there was no increase in consumer prices between June and July, compared with a 1.3 per cent monthly rise recorded the previous month. On an annual basis, the growth in the CPI fell back from a 9.1 per cent increase in June.

Both figures were improvements over economists’ expectations of a 0.2 per cent increase in the CPI on a monthly basis and an 8.7 per cent rise annually — but mean inflation is still close to 40-year highs.

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The data are unlikely to represent a large enough shift to stop the Fed from ploughing ahead with more aggressive tightening of monetary policy to subdue inflation. Fed chairman Jay Powell has said the US central bank was looking for “compelling” evidence that inflation was moving down towards its 2 per cent target.

The core measure of CPI — which strips away more volatile food and energy prices and is most closely watched by the Fed — also recorded an unexpectedly small monthly increase of 0.3 per cent compared with 0.7 per cent in June. But on an annual basis it rose at an unchanged pace of 5.9 per cent.

A potential sustained deceleration in inflation could mean the central bank might not need to keep raising interest rates at a steep pace for a long period. This could make a “soft landing” that avoids recession more likely. Earlier this week, the New York Fed said its consumer survey showed declining inflation expectations, which would also be an important factor in the policy decision-making process.

“With headline inflation still at 8.5 per cent and core inflation at 5.9 per cent, this is not yet the meaningful decline in inflation the Fed is looking for. But it’s a start and we expect to see broader signs of easing price pressures over the next few months,” said Paul Ashworth, chief US economist at Capital Economics.

Within the CPI, the drop in petrol prices was the driving factor of the deceleration, along with a decline in the cost of air fares. But the price of food and shelter continued to increase roughly in line with previous months, which will still weigh on the finances of many households.

“One of the problems with this number is that the rent pressure is lingering,” said Tom di Galoma, of Seaport Global Holdings, which could weigh on consumer spending. “I think the Fed wants to get this tightening cycle over with as soon as possible, which means a 0.75 percentage point increase in September.”

The inflation data were released following a strong jobs report last Friday that stamped out fears of a near-term recession but suggested the Fed was struggling to cool down the overheated economy.

It comes as the administration of President Biden and congressional Democrats have been celebrating the passage through the Senate of a $700 billion (€680 billion) climate, tax and healthcare Bill that represents a crucial pillar of the president’s economic agenda. While they have dubbed it the Inflation Reduction Act, the Bill is not expected to have a significant effect on prices in the short term.

However, certain measures are designed to reduce costs over the medium and long term, including a provision allowing the government to negotiate prescription drug prices. – Copyright The Financial Times Limited 2022