Prices that US consumers pay for a variety of goods and services rose 8.5 per cent in July from a year ago, a slowing pace from the previous month due largely to a drop in petrol prices.
On a monthly basis, prices were flat as energy prices broadly declined 4.6 per cent and gasoline fell 7.7 per cent. That offset a 1.1 per cent monthly gain in food prices and a 0.5 per cent increase in shelter costs.
Economists surveyed by Dow Jones were expecting headline CPI to increase 8.7 per cent on an annual basis and 0.2 per cent monthly.
Excluding volatile food and energy prices, so-called core CPI rose 5.9 per cent annually and 0.3 per cent monthly, compared with respective estimates of 6.1 per cent and 0.5 per cent.
Even with the lower-than-expected numbers, inflation pressures remained strong.
The jump in the food index put the 12-month increase to 10.9 per cent, the fastest pace since May 1979. Butter is up 26.4 per cent over the past year, eggs have surged 38 per cent and coffee is up more than 20 per cent.
Despite the monthly drop in the energy index, electricity prices rose 1.6 per cent and were up 15.2 per cent from a year ago. The energy index rose 32.9 per cent from a year ago.
Used vehicle prices posted a 0.4 per cent monthly decline, while apparel prices also fell, easing 0.1 per cent, and transportation services were off 0.5 per cent as airline fares fell 1.8 per cent for the month and 7.8 per cent from a year ago.
Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average up more than 400 points and government bond yields down sharply.
“Things are moving 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 per cent monthly increase in real wages. Inflation-adjusted average hourly earnings were still down 3 per cent from a year ago.
Shelter costs, which make up about one-third of the CPI weighting, continued to rise and are up 5.7 per cent over the past 12 months.
The numbers indicate that inflation pressures are easing somewhat but still remain near their highest levels since the early 1980s.
Clogged supply chains, outsized 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 slow economic growth that has bedeviled policymakers.
The July drop in petrol prices has provided some hope after prices at the pump rose past $US5 a gallon. But gasoline was still up 44 per cent from a year ago and fuel oil increased 75.6 per cent on an annual basis, despite an 11 per cent decline in July.
Federal Reserve officials are using a recipe of interest rate increases and related monetary policy tightening in hopes of beating back inflation numbers running well ahead of their 2 per cent long-run target. The central bank has hiked benchmark borrowing rates by 2.25 percentage points so far in 2022, and officials have provided strong indications that more increases are coming.
There was some good news earlier this week when a New York Fed survey indicated that consumers have pared back inflation expectations for the future. But for now, the soaring cost of living remains a problem.
While inflation has been accelerating, gross domestic product declined for the first two quarters of 2022. The combination of slow growth and rising prices is associated with stagflation, while the two straight quarters of negative GDP meets a widely held definition of recession.
The inflation numbers, released in the US overnight Wednesday, could take some heat off the Fed.
Recent commentary from policymakers has pointed toward a third consecutive 0.75 percentage point interest rate hike at the September meeting. Following the CPI report, market pricing reversed, with traders now anticipating a better chance of a lesser 0.5 percentage point move.
“At the very least, this report takes the pressure off the Fed at the next meeting,” Markowska said. “They’ve been saying they’re ready to deliver a 75 basis point hike if they have to. I don’t think they have to anymore.”