July Inflation Report: Inflation Remains Moderate as High Interest Rates Bite (2023)

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Inflation picks up, but with encouraging details under the surface.

But that pickup required context. Inflation was rapid in June of last year and slightly slower the following month. That means that when this year’s numbers were measured against 2022 readings, June looked lower and July appeared higher than if the year-ago figures had been more stable.

Economists are more keenly focused on another figure: the “core” inflation index that strips out volatile food and fuel prices. That picked up by 4.7 percent over the past year, down from 4.8 percent in June. And on a monthly basis, core inflation climbed just 0.2 percent, matching an encouragingly low reading in the previous month.

The upshot of the report was that inflation continues to cool — and the July details offered positive signs for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and which should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly.

“This is continuing the kind of progress I think that you want to see,” said Omair Sharif, the founder of Inflation Insights, a research firm. “Overall, this is pretty good news.”

Airfares fell sharply, hotel costs eased and used cars became cheaper last month. Big drops in those categories may be difficult to sustain but are helping to limit price increases for now.

The fresh inflation figures are likely to be in focus at the Fed, where officials are contemplating whether inflation has slowed enough for central bankers to stop lifting interest rates. Policymakers have raised the benchmark rate to a range of 5.25 to 5.5 percent, up from near zero in March last year. That is making it more expensive to borrow to buy a house or afford a car. As the Fed’s moves work their way through the economy, they slow it down and chip away at how much companies can raise prices.

“There are a lot of seeds in this report that suggest more disinflation to come,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, a research firm. “It probably means that we are at — or very close to — the peak on interest rates. We think we’re at the top.”

Officials are debating whether they need to raise rates again this year to ensure that the economy slows adequately to guarantee that inflation returns fully to normal. Mr. Sharif similarly said he thought that the fresh figures would make it easier for officials who want to hold off on a rate increase to make their case at the Fed’s next meeting, on Sept. 20.

They “will have a lot of ammo to skip September, based on what the data are showing us right now,” he said.

Even if it contained positive news for the Fed, the July inflation report could prove more difficult for the Biden administration to brag about, given the pickup in the headline number. Previous reports had shown a fairly across-the-board cooling.

And there is a risk that the overall inflation gauge could stay higher into next month.

Gas prices began to pick up at the end of July. Although the jump came too late to matter much for that month’s report, it has persisted into August and will probably prop up inflation in the next set of figures — which will be the last ones released before the Fed meets to make its next decision on interest rates.

Paul Ashworth, the chief North America economist at Capital Economics, wrote that “other than triggering a rebound in airline fares via higher jet fuel prices, we expect the knock-on impact” of higher fuel costs “to be pretty modest.”

Altogether, he added, there was “nothing here to suggest the Fed needs to push ahead with further interest rate hikes this year.”

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Mr. Biden focused on a string of positive long-term developments in price data: “Annual inflation has fallen by around two thirds since last summer, and inflation outside of food and energy has fallen to its lowest level in any three-month period since September 2021,” he said.

The rise in rent costs continued to slow.

More relief could be on the way. Private-sector rent indexes have shown a steeper slowdown in growth, or even outright declines in some cities. Researchers at the Federal Reserve Bank of San Francisco this week analyzed those data sources and concluded that housing inflation “will continue to slow through late 2024 and may even turn negative by mid-2024.”

That would be welcome news for renters, who have seen their housing costs rise nearly 18 percent since the pandemic began. And it would be good news for policymakers at the Federal Reserve because rent — along with other housing costs, which are closely related — is by far the largest component of the Consumer Price Index.

Rents may be easing in part because of a boom in apartment building, which has continued even as construction of single-family homes has slowed.

“Lots of apartments are coming online; that’s good news for the shelter inflation component,” said Robert Dietz, chief economist at the National Association of Home Builders. “We should see rent growth slowing.”

Still, while rents are rising more slowly, they are unlikely to fall: Unlike gas prices or airfares, rents rarely go down.

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Airline fares sink again, providing some relief for travelers.

Airfares have been on a wild ride over the past few years, surging to nearly 23 percent above prepandemic levels in 2022 as Americans made up for lost travel time during shutdowns and airlines struggled to keep up with demand.

The number may be slightly deceptive, however, as the Labor Department’s measure is overwhelmingly composed of domestic fares.

Consumer demand has shifted to trips abroad, as travelers have flocked to destinations in Europe, Mexico and Asia. United Airlines, for example, noted in its second quarter earnings call that international passenger revenue was up 44 percent over the previous year. Delta’s was up 61 percent, while domestic passenger revenue had grown only 6 percent.

There is typically a pullback in domestic airfares in July, because fewer people are booking trips for the fall, after the peak summer travel season. This year, the dip began earlier than usual, bringing fares down substantially.

That does not mean chaos in the air travel sector is over, however. Companies continue to struggle with air traffic control capacity at airports, delays in aircraft delivery and training new staff. At the same time, passenger volumes remain high.

“As a result, we see a significant gap between the supply that is in place and what demand could sustain, and we expect this gap will remain for an extended period of time,” said Delta Air Lines’ chief executive, Ed Bastian, told investors.

The normalization of domestic fares will help travelers keep costs down, as hotel prices remain 13.7 percent above prepandemic levels.

Food prices ticked up in July, but showed signs of moderating.

Grocery prices rose 0.3 percent in July, up from June, when prices were flat. The cost of eating at restaurants continued to rise, climbing 0.2 percent over the month, a slowdown from 0.4 percent in June.

Food inflation has slowed in recent months, bringing relief to grocery shoppers who have been pinched by higher prices. Still, food prices are much higher than they were a year ago, and costs have been climbing at a faster rate than normal. In the year through July, food prices rose 4.9 percent, down from 5.7 percent in June.

Prices for fruits and vegetables increased 0.4 percent in July, cooling from a 0.8 percent increase in June. A gauge of costs for meats, poultry, fish and eggs rose 0.5 percent in July, a pick up from June, when prices declined 0.4 percent.

Egg prices continued to tumble after an outbreak of bird flu and other factors led to a surge in prices earlier this year. In July, egg prices fell 2.2 percent from the prior month, which came after a 7.3 percent decline in June.

Some economists said they expected food inflation to continue to moderate in the coming months but that risks remained.

Diane Swonk, the chief economist at KPMG, said food price increases had cooled in recent months, in large part because earlier supply shocks had abated. Lower fuel prices have also helped bring down the cost of transportation.

But, she said, food prices could still face pressure from various factors, such as the damage from record heat on crop yields and the collapse of the Ukraine grain deal last month. At a news conference in late July, Jerome H. Powell, chair of the Federal Reserve, said that he did not expect the subsequent rise in grain prices at the time to “make a significant contribution to U.S. inflation,” but that officials would continue to monitor the situation carefully.

Many consumers are still finding it difficult to afford higher food costs, even though prices are rising at a much slower pace than they were a year ago, Ms. Swonk said.

“For consumers who just now saw wages outpace inflation for the first time since the onset of pandemic on an individual basis, the level of prices is still too high for them,” she said.

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“Today’s CPI data shows inflation is down from July 2022’s historic highs of 8.5 percent to just 3.2 percent in July 2023 — a dramatic drop and a feat we’ve accomplished while securing record job gains and stable economic growth,” said Representative Brendan F. Boyle of Pennsylvania, the top Democrat on the Budget Committee.

It’s a sign of relief among investors after some retrenchment in the market over the past week. The 10-year Treasury yield, an important measure of future interest rates, inched below 4 percent, another welcome sign for stock investors.

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While new car prices are not falling back to pre-pandemic level, “new-vehicle price inflation has all but disappeared in 2023,” Kelley Blue Book’s research manager, Rebecca Rydzewski, said.

As Fed officials downplay wage growth, the focus centers on inflation.

Earlier this year, Fed officials regularly pointed to wage growth as a sign that they needed to do more to slow the economy down. The logic was that if demand for workers continued to outstrip supply so much that employers had to lift pay rates, companies would try to make up for those higher costs by charging consumers more. With everyday costs climbing, workers themselves would keep asking for higher pay. It could become a self-perpetuating circle of higher pay and higher prices.

But wage gains have been cooling in recent months, including in the Employment Cost Index, which the Fed watches closely. That seems to have eased central bankers’ concerns — and officials now regularly point out that they are setting policy based on what happens with inflation, not pay.

Jerome H. Powell, the Fed chair, said in June that although wage growth had not been the initial driver of inflation, many economists felt that slowing it down “to a level that is sustainable, that is consistent with 2 percent inflation” would play a role in controlling price increases.

“I think many, many analysts believe that it will be important — an important part of getting inflation down,” he said, noting that wage growth was in fact gradually slowing.

His statements on wages have softened since.

“I don’t think we’re targeting wage inflation,” Mr. Powell said at a news conference in July, noting that the recent progress on wages was exactly what the Fed had been hoping to see. The labor market, he said, is “gradually slowing, it’s gradually cooling — that’s a good prescription for getting where we want to get.”

And John C. Williams, president of the Federal Reserve Bank of New York, reiterated that view to The New York Times in an interview last week.

“I don’t sit there thinking: We need to see wage growth do one thing or another in the next year or two,” Mr. Williams said. “We’re still on a pretty strong demand relative to supply situation, but things are moving in the right direction. That’s what we need to see.”

How long will companies keep raising prices on consumer goods?

Many consumer goods companies have raised prices by double-digit percentages in the past year, a move they often attribute to rising commodity prices. Hershey’s, for example, has said rising costs for sugar and cocoa — a result of weather conditions where those staples are grown — are to blame for its price increases.

But other companies have seen their ingredient costs go down.

Commodities prices are “moving favorably,” said Kraft Heinz’s chief financial officer, Andre Maciel. The company — which makes Heinz 57 Sauce, Lunchables snacks and Jell-O desserts — raised prices by 11 percent in its most recent quarter.

When asked by analysts if Kraft Heinz had raised prices too soon and by too much, the company’s chief executive, Miguel Patricio, said: “I would do everything again.”

But as costs go down, the question is whether the high prices will stay.

Ian Borden, chief financial officer of McDonald’s, said he expected “our pricing levels to also start to come down” along with cooling inflation.

On the other hand, the Clorox’s chief executive, Linda Rendle, told analysts that it did not plan to reduce prices if its costs fell. The company — which sells Burt’s Bees skin care products and Brita water filters, as well as a slew of cleaning products — increased its prices by 16 percent in its most recent quarter.

“We intend for these price increases to stick,” she said.

The jump in prices has allowed some companies to keep increasing profits while selling fewer products. Other companies, such as the energy drink company Monster Beverage, have raised prices and sold more. Both trends point to a consumer who is able to absorb higher prices.

Rodney Cyril Sacks, chief executive of Monster, told analysts that price increases “have not significantly impacted consumer demand."

But some companies are starting to feel consumers tighten their purse strings, either by buying bulk items or switching to generic brands.

Consumers are “really maximizing their pantries,” said Steven Cahillane, chief executive of Kellogg Company.

“They’re closely managing their household inventories, their pantry inventories, zealously guarding against waste, as you would expect in this environment,” he told analysts.