US inflation slows in July, but cost pressures remain

Prices paid by US consumers climbed in July at a more moderate pace, though not enough to provide major relief from the cost increases weighing on sentiment and driving policy debate.

The consumer price index increased 0.5% from June and 5.4% from a year ago, according to Labour Department data released on Wednesday. Excluding the volatile food and energy components, so-called core CPI rose 0.3% from the prior month and 4.3% from July 2020.

Price measures of food, energy, shelter and new vehicles all contributed to the July gain. Airfares and auto insurance costs declined.

Faced with supply constraints and surging demand, businesses are raising prices for goods and services as cost pressures mount. Ongoing challenges including shortages of materials, shipping bottlenecks and hiring difficulties are likely to continue to put broader upward pressure on prices in the months ahead.

At the same time, some of the price surges linked to the economy’s reopening are beginning to ebb. The Labour Department said a smaller gain in the costs of used cars and trucks was a “major factor” in the moderation of the core CPI.

“July was a bit of a transition month, as the reopening surge in prices started to abate while other categories show signs of taking the baton,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.

The gain in the overall CPI from the prior month was in line with economists’ projections, while the core rate was less than forecast.

The S&P 500 opened higher, while the yield on the 10-year Treasury fell along with the dollar.

Fed policy

Federal Reserve chair Jerome Powell has emphasised elevated inflation will ultimately prove temporary, but it’s unclear when supply constraints will ease. A New York Fed survey released on Monday shows consumers’ inflation expectations over the next year are at a record high, while expectations for the medium term rose to an eight-year high.

The path of inflation in the coming months has policy implications both for the Fed, in terms of its timeline for reducing monetary support, as well as President Joe Biden.

Persistent inflation may make it harder for Biden to win unified Democrat support for another $3.5-trillion in social spending after the trillions of dollars of fiscal relief already injected into the economy since the start of the pandemic.

“The July CPI report showed reopening-sensitive categories moderating in importance, posting the weakest contribution to the month-over-month gain since March. Services categories will take the baton over time, evident in our view that rents — a third of the CPI — will look sturdier over the second half,” Bloomber economists Andrew Husby and Eliza Winger said in a note.

Many companies have increased, or plan to increase, consumer prices to offset higher material and production costs, including Colgate-Palmolive, Procter & Gamble, and Kimberly-Clark.

American consumers are experiencing higher prices for dining out, groceries and personal care, the CPI data shows. Costs of food away from home rose 0.8% in July, the biggest monthly advance since 1981.

Bolstered by pandemic savings, eager-to-spend consumers have been price takers as of late. Spending patterns, however, may change when the surge in demand from reopening eases and if concerns about the Delta variant curb economic activity.

Shelter costs, which are seen as a more structural component of the CPI and make up about a third of the overall index, increased 0.4% and accounted for more than half the monthly gain in the core index.

Muted rents

The rent index rose 0.2%, as owners’ equivalent rent — a gauge of price appreciation for purchased homes — climbed 0.3%. While rents and home values have jumped recently, it takes time for the price shifts to feed into the official inflation measures.

The cost of lodging away from home, which includes hotel stays, continued to soar, rising 6% in July.

While wages have strengthened in recent months, higher consumer prices are eroding Americans’ buying power. Inflation-adjusted average hourly earnings declined 0.1% in July after a 0.5% drop a month earlier, according to separate data on Wednesday.

“For now, the streak of outsize inflation surprises is over,” Jefferies Group Aneta Markowska and Thomas Simons said in a note. “However, it remains to be seen whether the period of elevated price pressures is truly over.”

Bloomberg News. More stories like this are available on bloomberg.com