July CPI report shows inflation gauge rose 3.2%, less than expected

• The consumer price index rose 3.2% from a year ago in July, slightly below expectations. The core CPI ran at a 12-month rate of 4.7%, also below the estimate. Both measures were up 0.2% on the month.
• Almost all of the monthly inflation increase came from shelter costs, which rose 0.4% and were up 7.7% from a year ago.
• Real wages adjusted for inflation increased 0.3% on the month and were up 1.1% from a year ago.
• While inflation has come well off its 40-year highs of mid-2022, it is still considerably above the 2% level where the Federal Reserve would like it.

The consumer price index rose 3.2% from a year ago in July, a sign that inflation has lost at least some of its grip on the U.S. economy.

Prices accelerated a seasonally adjusted 0.2% for the month, in line with the Dow Jones estimate, the Bureau of Labor Statistics reported Thursday. However, the annual rate was slightly below the 3.3% forecast though higher than June and the first increase in more than a year.

Excluding volatile food and energy prices so-called core CPI also increased 0.2% for the month, matching the estimate and equating to a 12-month rate of 4.7%, the lowest since October 2021. The annual rate for the core also was slightly below a Dow Jones consensus estimate for 4.8%.

Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average up more than 200 points and Treasury yields mostly lower.

"It is not quite 'mission accomplished' yet, but significant progress on the inflation front has been made," said Sung Won Sohn, chief economist at SS Economics and professor of economics and finance at Loyola Marymount University. "On balance, the inflation picture has improved significantly. The Federal Reserve will stop raising the interest rate soon."

Almost all of the monthly inflation increase came from shelter costs, which rose 0.4% and were up 7.7% from a year ago. Rents rose 0.4% The BLS said more than 90% of the increase came from that category, which accounts for about one-third of the CPI weighting.

Food prices climbed 0.2% on the month, and the BLS said energy increased just 0.1% even though crude oil prices surged during the month and prices at the pump jumped as well.

Used vehicle prices declined 1.3% and medical care services were off 0.4%. Airline fares fell 8.1% on the month, the same as in June, and are down 18.6% from a year ago after surging in the early days of the Covid pandemic.

"While it would be fair to describe prices as still relatively high in places such as shelter and used cars, we are witnessing a rate of change that is encouraging to consumers, as well as to Federal Reserve policymakers," said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

The comparatively tame inflation levels helped raise worker pay. Real wages increased 0.3% on the month and were up 1.1% from a year ago, the BLS said in a separate release.

The annual rate for headline inflation, while below expectations, actually marked an increase from the 3% level in June.

Together, the latest batch of data shows that while inflation has come well off its 40-year highs of mid-2022, it is still considerably above the 2% level where the Federal Reserve would like to see it and high enough that cuts in interest rates are unlikely anytime soon.

"While inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates," said Seema Shah, chief global strategist at Principal Asset Management. "Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view."

Decelerating levels, though, are at least taking some of the pressure off the Fed to keep tightening policy.

After hiking benchmark interest rates 11 times since March 2022, central bank officials are widely expected to take a break in September. However, it's up for debate what happens from there, and public statements from policymakers have shown disparate opinions.

Earlier this week, regional Fed Presidents John Williams of New York and Patrick Harker of Philadelphia made comments indicating they could see the rate hikes at an end. However, Governor Michelle Bowman said she expects more increases, while fellow Governor Christopher Waller also has pointed toward the possible need for additional hikes ahead.

Regardless of whether the Fed approves any additional hikes, virtually all members have agreed that the higher rates are likely to stay in place for some time.

The elevated rates have yet to put a dent in economic growth: The first half of 2023 had seen GDP post gains of 2% and 2.4% in the first two quarters, respectively, and the Atlanta Fed is tracking third-quarter growth of 4.1%. Payroll gains have been slowing but are still solid, and unemployment is near its lowest since late in 1969.

Consumers have begun to be a bit stretched and increasingly are turning to credit cards and savings for their spending. Total credit card debt surpassed $1 trillion for the first time this year, according to New York Fed data.

However, more economists are beginning to expect the U.S. can avoid a recession despite the aggressive rate hikes. Bank of America, Goldman Sachs and JPMorgan Chase all recently have forecast that a contraction is becoming less likely.

Correction: The annual inflation rate was higher than June. An earlier version mischaracterized the historical relationship.