US consumer prices did not rise in July thanks to a sharp drop in the cost of energy, including gasoline, in a first sign of notable relief for Americans who have seen inflation accelerate in recent years.
The Consumer Price Index (CPI) was unchanged last month after rising 1.3% in June, the Labor Department said on Wednesday, in a much-anticipated report, which could allow the Federal Reserve (fed) begin to reduce the size of interest rate hikes at its next meeting in September.
This is the biggest month-on-month slowdown in prices since 1973, and comes after a decline of about 20% in the value of gasoline.
Prices at gas stations had soared in the first half of this year due to the war in Ukraine, hitting a record high, on average, of more than $5 a gallon in mid-June, according to motoring advocacy group AAA. .
Economists polled by Reuters had expected a 0.2% rise in the CPI monthly in July. However, the Fed has said several monthly declines in CPI growth are needed before the increasingly aggressive monetary policy tightening it has pursued to rein in inflation, which is currently at four-decade highs, ceases.
Investors immediately reduced bets that the Federal Reserve will raise interest rates by 75 basis points for the third consecutive time at its meeting on September 20-21, and considered that the US central bank could opt for half a percentage point.
“Not yet the significant decline in inflation the Fed is seeking. But it is a start and we expect to see broader signs of easing in price pressures in the coming months.“, said Paul Ashworthchief US economist at CapitalEconomics.
Consumer prices in the United States have risen due to a number of factors, including problems with global supply chains, massive government stimulus from the start of the COVID-19 pandemic, and Russia’s invasion of Ukraine.
Food is a component of CPI which remained on the rise in July, rising 1.1% after rising 1% in June.
In the 12 months to July, the CPI rose 8.5%, less than expected, after a 9.1% rise in June. Underlying inflationary pressures, which exclude volatile food and energy components, also showed some encouraging signs.
The so-called core CPI rose 0.3% in July after gaining 0.7% in June, but advanced 5.9% in the 12 months to July, the same pace as in June.
The cost of rent and owner’s primary residence rent equivalent, which is what a landlord would receive for renting a home, were almost flat last month. Housing costs comprise around 40% of the basic measure of the CPI.
Tight labor market
The trajectory of the rates of the fed it is of central interest to investors, businesses and consumers.
Monetary policymakers signaled last week that they will keep raising rates until they see strong and lasting evidence that inflation is on track to return to the 2% target.
An extremely tight labor market is also driving up wages, and there may be little relief on this front in light of stronger-than-expected job growth and wage increases in July.
The economy added 528,000 jobs last month and the unemployment rate fell back to its pre-pandemic low, the government said on Friday.
The tightness of the labor market is also underscored by the fact that although US job openings fell to their lowest level in nine months in June, there were still almost two jobs for every unemployed person.
The strength of the labor market will make it difficult for the fed the task of bringing the economy into balance soon. The Fed has raised its interest rate by 225 basis points since March, despite fears that sharply rising borrowing costs will spark a recession.