It’s too early to call it, but the long period of inflation that has plagued the U.S. economy may finally be sputtering out. On Wednesday, the federal government reported that the Consumer Price Index, its measure of price increases, rose 8.5 percent in July for the year — a big increase, for sure, but a major drop from the previous month’s peak of 9.1 percent. What caused the about-face is the same thing that pushed inflation up to 40-year highs: The price of gas, which has now fallen 55 days in a row to around $4 a gallon, about a dollar cheaper than the June peak, according to the AAA. One of the most surprising revelations from the report was that the monthly change in inflation was totally flat. It’s a good sign, one with some major caveats, but an unmistakable bit of relief from the highest rate of inflation in more than 40 years.
This most recent era of inflation has been a long and rough one, starting in the beginning of 2021 and, with few exceptions, marking successively higher prices month after month. As a consumer, it’s been exhausting. Since February, the price of oil and gas have basically been driving the rise in prices — which peaked in June at a 9.1 percent annual increase — but you’ve probably noticed the pain everywhere: rents rising to unaffordable levels; the price of meat and cereals increasing; even getting a plumber or a babysitter can make you double-check your account balance. Reports about record corporate profits added to the persistent feeling that greed has been a pernicious motivator of rising prices. Yes, people have been able to keep pace somewhat by switching jobs and getting better pay, but whatever increase in paychecks that people have been able to secure has largely been outstripped by the rising price of gas, groceries, and shelter.
The July CPI is just a single report, but as far as these things go, its potential for influencing the direction of the economy for the rest of the year can hardly be overstated. After it came out, Wall Street rallied. The thinking here is that the Federal Reserve, which has been trying to tamp down inflation by embarking on the most aggressive campaign of interest rate hikes since the 1980s, might ease up a little bit when the central bankers meet next month. At the last two meetings, the central bank hiked rates by 0.75 percent, which are historically steep rates, in order to tighten the flow of money and ease up on the pace of expansion. (The last time it raised rates by that much, it took the bank more than two years to do it.) With a decrease in CPI, as well as a more conservative measure of inflation that strips out gas and food prices, investors are betting that the Fed will likely only hike by 0.5 percent. Practically, this is only a small easing in pressure on the money supply, but if this is in fact the path that the Fed takes, it’s a symbolically significant move that shows not only that the worst is over, but that its plans are working.
The clearest thing that can be taken away from this report is that the most extreme part of this inflationary era (expressed in the rise in prices and the action from the Fed) is probably done. Remember, while 8.5 percent inflation is basically at around 40-year highs, the preceding 11 months — a period when the Fed was still actively keeping rates at 0 and buying debt — are baked into that number. However, there are trouble spots. The price of food, especially at grocery stores, is at the highest level since 1979. And the owner’s equivalent rent (a proxy for actual rent prices) rose 0.7 percent. “Prices are still growing, which is what you want to see in a healthy economy, but the Fed has shown some ability to rein price growth in a bit so wages can catch up,” Callie Cox, investment analyst at eToro, said in a note. Since the unemployment rate fell last month to 3.5 percent (matching the low of the Trump era, a rate not seen since 1969), we may be nearing a time when we can feel good about the economy again.