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Annual Inflation Falls More Than Expected in July as Gas Price Drop Offsets Housing and Food Costs

U.S. News & World Report logo U.S. News & World Report 8/10/2022 Tim Smart
FILE - The price of regular unleaded gas is advertised for just under $4 a gallon at a Woodman's, Wednesday, July 20, 2022, in Menomonie Falls, Wis. Falling gas prices gave Americans a slight break from the pain of high inflation last month, though the surge in overall prices slowed only modestly from the four-decade high it reached in June. (AP Photo/Morry Gash, File) © (Morry Gash/AP-File) FILE - The price of regular unleaded gas is advertised for just under $4 a gallon at a Woodman's, Wednesday, July 20, 2022, in Menomonie Falls, Wis. Falling gas prices gave Americans a slight break from the pain of high inflation last month, though the surge in overall prices slowed only modestly from the four-decade high it reached in June. (AP Photo/Morry Gash, File)

In the first sign that rampant inflation may be slowing down, the annual rate of prices paid by consumers fell more than expected in July, the Bureau of Labor Statistics reported on Wednesday.

The eagerly anticipated report shows the annual rate of inflation declined to 8.5% from 9.1% in June but remains at levels not seen since the 1980s. The core rate, excluding often-elevated food and energy costs, was unchanged from June’s 5.9% level but below forecasts of a 6.1% rise.

Economists had forecast the rate would dip to 8.7% annually. Dow Jones Industrial Average futures soared 400 points in pre-market trading on the news.

“Largely driven by falling gas prices, inflation dipped slightly in July from the 40-year high reported in June,” said Lisa Sturtevant, chief economist of Bright MLS. “Other prices – including prices of online goods – dropped in July and consumers report they expect lower inflation in the months ahead, which are all signs of a potential turnaround in the inflation picture.”

“The easing of overall inflation coupled with strong labor market conditions could provide some optimism to the Federal Reserve that the rate hikes are working and that the elusive “soft landing” – that is, bring inflation down without sending the labor market tumbling – is a possibility,” Sturtevant added. “However, high housing costs and the challenges they post to prospective buyers and renters will continue to be a strain on the economy.”

The Federal Reserve and the White House are looking for any indication that runaway inflation is receding, following two consecutive months of interest rate hikes. The Fed does not meet again until September and will then consider whether to raise rates by 50 or 75 basis points, as it did in June and July.

There are slivers of hope in some recent readings, including one from Adobe Insights released Tuesday that showed e-commerce prices decreased for the first time in nearly two years. Also Tuesday, the Federal Reserve Bank of New York’s monthly survey of inflation expectations showed those have fallen sharply since its prior reading.


Video: Gas prices below $4 amid signs inflation easing (Reuters)

Driving much of the drop and hope is the falling price of gas. Prices for a gallon of regular gas have dipped below $4 after hitting $5.03 in mid-June. The decline follows the price of oil, now at around $90 a barrel after hitting more than $125 a barrel following the Russian invasion of Ukraine in late February.

The combination of high inflation and rising interest rates has many saying the U.S. is in a recession, after growth in the nation’s gross domestic product for the second quarter came in at a negative 0.9%. That marked the second quarter in a row, as first quarter growth contracted by 1.6% – a common definition of a recession but one that is not the official marker.

“Although ‘two consecutive negative quarters’ is commonly used to mark a ‘technical recession,’ ultimately, there is not one best definition of a recession,” Gargi Chaudhuri, head of iShares investment strategy Americas, wrote on Tuesday.

“We are currently in such an atypical cycle that we are more inclined to favor a qualitative approach to a recession call and focus on our own recession monitor … which points to a dichotomy where three of the five metrics related to corporate health are now flashing red for recession and yet the two metrics related to the consumer are still green and strong, pointing to an economy that is slowing but yet showing some signs of strength as it pertains to the consumer and the labor market.”

So far, the labor market is holding up well. Last week, the Labor Department reported that 528,000 new jobs were created in July, more than double expectations, quelling talk of a recession for now.

Consumers are still spending, says Jonathan Silver, CEO of Affinity Solutions, which tracks more than 100 million credit and debit card transactions weekly for clients. But they are switching their preferences and looking for bargains.

“There’s a lot of shifting behavior going on, from department stores to discount stores, from going out to restaurants to eating in,” Silver says.

Spending at groceries and wholesale clubs was up 23% in July year over year, he says, while spending at restaurants fell 3.5%. While department stores saw spending slump 2.4%, discount stores registered a 17% increase.

“I think people are trading down in certain categories,” Silver adds.

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