The prices consumers pay for a variety of goods and services rose 8.5% in July from a year earlier, a slower pace than the previous month, largely due to lower gasoline prices.
On a monthly basis, the consumer price index was flat as energy prices fell a massive 4.6% and gasoline fell 7.7%, according to the Bureau of Labor Statistics. This offset a 1.1% monthly gain in food prices and a 0.5% rise in shelter costs.
Economists polled by Dow Jones had expected headline CPI to rise 8.7% on an annual basis and 0.2% monthly.
Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared to respective estimates of 6.1% and 0.5%.
Even with lower-than-expected numbers, inflationary pressures remained strong.
The food index jumped to 10.9% in 12 months, the fastest pace since May 1979. Butter is up 26.4% over last year, eggs up 38% and coffee over 20%.
Despite the monthly decline in the energy index, electricity prices rose 1.6% and rose 15.2% from a year earlier. The energy index rose 32.9% from a year ago.
Used car prices posted a 0.4% monthly decline, while apparel prices also fell, falling 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% in the month and 7.8% from a year ago.
Markets reacted positively to the report, with Dow Jones Industrial Average futures rising more than 400 points and government bond yields falling sharply.
“Things are going in the right direction,” said Aneta Markowska, chief economist at Jefferies. “This is the most encouraging report we’ve had in quite some time.”
The report was good news for workers, who saw a 0.5% monthly increase in real wages. Inflation-adjusted average hourly earnings were still 3% lower than a year ago.
Shelter spending, which makes up about one-third of the CPI weight, continues to rise and rose 5.7% over the past 12 months.
The numbers indicate that inflationary pressures are easing slightly but are still near their highest levels since the early 1980s.
Clogged supply chains, excess demand for goods over services and trillions of dollars in pandemic-related fiscal and monetary stimulus have combined to create an environment of high prices and slowing economic growth that has baffled policymakers.
A drop in gas prices in July offered some hope after pump prices topped $5 a gallon. But gasoline is still up 44% from a year ago and fuel oil is up 75.6% on a year-over-year basis despite an 11% decline in July.
Federal Reserve officials are using a recipe of interest rate hikes and related monetary policy tightening in hopes of pushing inflation numbers back well below their 2% long-term target. The central bank has raised benchmark lending rates by 2.25 percentage points so far in 2022, and officials have given strong indications that more hikes are coming.
There was some good news earlier this week when a New York Fed survey indicated that consumers had lowered inflation expectations for the future. But for now, the rising cost of living remains a problem.
While inflation is accelerating, gross domestic product contracted in the first two quarters of 2022. The combination of slow growth and rising prices is associated with stagflation, while two straight quarters of negative GDP meet a widely accepted definition of recession.
Wednesday’s inflation numbers may take some heat off the Fed.
Recent comments from policymakers pointed to a third consecutive 0.75 percentage point interest rate hike at the September meeting. After the CPI report, market prices reversed, with traders now anticipating a good chance of a move lower by 0.5 percentage points.
“At the very least, this report eases pressure on the Fed at the next meeting,” Markowska said. “They’ve said they’re prepared to raise 75 basis points if they need to. I don’t think they’ll have to.”