Inflation eases for July, but U.S. ‘not out of the woods’ yet

Inflation finally dropped in July, giving Americans a much-needed break after June’s four-decade high, but the country’s economic future still remains uncertain.

“We’re not out of the woods,” said Nancy Kimelman, a Northeastern University professor and former economist with the Federal Reserve.

Prices rose 8.5% over the previous year in July, a drop from June’s 9.1% peak. Prices also remained virtually unchanged from June to July, the smallest jump in two years.

A decline in gasoline prices drove much of the drop, though other travel expenses, including airfare and hotels, also notably fell.

“We’re all thrilled to pieces that gasoline is costing us less,” Kimelman said. “But if you look away from the energy sector, if you walk away from the pump, pretty much everything else in the economy is still going up in price.”

Costs like food, medical care and rent largely continued to soar through July.

Core inflation, a measure excluding volatile food and energy categories, rose 0.3% from June, the smallest month-to-month increase since April. Year-over-year core inflation amounted to 5.9% in July, the same as June.

Wednesday’s report buoyed the financial market’s hopes the Fed may raise interest rates by a half point rather than a third three-quarter hike next month. The positive indication led to a quick jump in the stock market Wednesday morning, with the S&P 500 rising 2.1% to a three-month high.

The measure only accounts for one month, though, and inflation may not have topped out just yet.

Many economists forecast inflation will remain well above the Fed’s 2% annual target through 2023 or even 2024.

A more promising indicator of a long-term drop in inflation, Kimelman said, would be a decrease in wage growth. Though it’d hurt workers, she said, putting the breaks on wage increases could slow the “wage price spiral,” in which higher prices push up the cost of labor and the higher cost of labor pushes up prices.

But the job market has remained tight, with the Bureau of Labor reporting over 528,000 new jobs in July.

The strong labor market, along with the second quarter of GDP decline — a informal indicator of a recession — and the decline in inflation has left economists with a basket of mixed signals and no clear course of action.

“If you argue that the inflation numbers are a little softer, ‘Yes, but it was one month’s figure.’ If you say GDP was down in the first and the second quarters, ‘Yeah, but look at the job growth.’ ” Kimelman said.

“On the other hand, if you say, ‘Gee, look at that job growth, the Fed still has to be aggressive,’ then somebody else is going to say ‘Take a look at the first few quarters of the year when we declined,’ ” she continued. “This is really a mess.”

The effect of the Fed’s monetary policy or political policy is likely to be unclear for a while, Kimelman warned.

“When you’re dealing with an economy the size of ours, which is over $20 trillion, things don’t turn on a dime — there are lags involved,” Kimelman said. “That notion that there’s a time involved is largely lost when you read the popular press. It’s largely lost when people are trying to understand what’s happening.”