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The 2-minute drill

Inflation takes a July vacation

Consumers got a reprieve last month as price increases moderated. But the cost of living remains painfully high.

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.David Zalubowski/Associated Press

Finally, some good news on inflation.

Prices Americans pay for goods and services were unchanged in July from a month earlier, the first time they haven’t gone up since May 2020. Falling gasoline costs offset increases in food and housing costs, according to the latest reading of the government’s Consumer Price Index, released on Wednesday.

At a time of deep uncertainty about the economy, the lull was a welcome relief.

“We’ve likely seen the inflation peak,” Justin Wolfers, an economist at the University of Michigan, said in a tweet.

Optimism is healthy, but let’s not get too cocky.


Previous predictions that the worst of inflation was behind us proved premature. And after 17 months of accelerating prices gains, the cost of living is painfully high.

Prices jumped 8.5 percent over the past 12 months. While that’s an improvement from June’s 9.1 percent annual clip, inflation is running at a rate that was unimaginable a year ago.

That simple fact will keep the pressure on the Federal Reserve to continue boosting interest rates in an effort to reverse a trend that has left Americans deeply unsettled about their future finances. The twist, of course, is that as rates rise and the economy slows down, more workers will lose their jobs, further weighing on consumer confidence.

Still, the CPI report may give central bank officials some leeway to push up rates less aggressively when they next meet in September. Policy makers have hiked the federal funds rate at the quickest pace in decades, including two straight outsize increases of three-quarters of a percentage point. The benchmark rate is now in the range of 2.25 to 2.5 percent, up from near zero as recently as March.

Taking a queue from Monty Python’s Eric Idle, Wall Street chose to look on the bright side of life. Stock prices surged Wednesday, as investors reacted to the prospect of smaller rate increases. Government bonds rose, pushing yields lower.


So what did we learn from this CPI report?

First, falling gasoline prices make a big difference. Prices at the pump declined 7.7 percent in July from a month earlier.

Filling your tank has gotten cheaper over each of the past 57 days since regular gas topped out at more $5 a gallon in June, according to AAA. In Massachusetts, the average price of regular is now $4.34 a gallon, down from a high of $5.05 but well above $3.04 a year ago, AAA data show.

Other categories that had seen sharp price increases reversed course in July, including airfares, car rentals, and used cars.

The overall decline in energy prices — natural gas from utilities fell 3.6 percent, though electricity costs rose 1.6 percent — offset a continued rise in food costs. That comes as no surprise to anyone who has been in a grocery store recently, where prices rose 1.3 percent from June. Egg prices increased by 4.3 percent, while peanut butter and coffee were up 3.5 percent.

There is a glimmer of hope that a trip to the grocery store won’t be so bleak in coming months. Prices of food commodities have declined after a spike caused by the war in Ukraine, according to Brian Bethune, an economist at Boston College.

“However, it may take a couple of months for the drop in grain prices to affect prices at the local grocery store,” he said. “There has been a massive shift to discount grocery distributors which is not reflected in the cost of living.”


Excluding often-volatile energy and food prices, the CPI rose 0.3 percent in July, the smallest increase in three months, and climbed 5.9 percent over the past year. The Fed pays close attention to this so-called core CPI because officials believe it’s a better gauge of where inflation is heading.

Second, housing costs keep going up.

Rents rose 0.7 percent in July and the rent equivalent of owning a house increased 0.6 percent. Housing accounts for about one-third of CPI, so the overall inflation picture won’t change too much until these costs moderate.

But there are signs that higher mortgage rates are taking some air out of the housing market. Price growth is slowing in many markets around the country, and inventories are expanding. Moreover, rates on a 30-year fixed mortgages have eased, falling below 5 percent last week after approaching 6 percent in June.

Third, inflation is eating up wage gains.

Average hourly earnings for all employees rose 0.5 percent in July from the previous month, according to a separate government report out Wednesday. While the increase outpaced the 0.3 percent inflation rate for the month, results for the past 12 months show workers falling behind. Average hourly wages climbed 3 percent compared with July 2021, far less than the 8.5 percent inflation rate.


Finally, one month doesn’t make a trend.

The CPI comparison between June and July looks promising. But compared with July 2021, inflation is running near a four-decade high and far ahead of the Fed’s target of 2 percent.

Jerome Powell, the Fed chairman, has said he wants to see sustained evidence of inflation’s retreat before taking his foot off the economic brake.

True, the inflationary impact of the Ukraine war is starting to ease, as are supply chain disruptions caused by COVID.

But the labor market remains super tight. The US economy created an astoundingly robust 528,000 jobs in July, the Labor Department said on Friday, and the unemployment rate dipped to 3.5 percent, matching a five-decade low last seen just before pandemic lockdowns began in March 2020.

With employment growing, consumers have more money to spend, which puts upward pressure on prices. Until the job market cools, inflation will be tough to wrestle to the ground, even if it took a breather in July.

Larry Edelman can be reached at Follow him @GlobeNewsEd.