WASHINGTON (AP) — If the Federal Reserve needs further evidence that the worst price increase in four decades is starting to ease, it will likely come on Wednesday, when the government is expected to announce that inflation cooled further last month.
According to a survey by FactSet, consumer prices are likely to have risen by just 0.2 percent from June to July. This means that the Fed’s inflation target of two percent is only slightly above the annual inflation target. Compared to the previous year, inflation is likely to remain unchanged at three percent, the same as in June.
Excluding fluctuating food and energy costs, core prices are also expected to have risen by 0.2 percent compared to June and by 3.2 percent compared to the same period last year. This is just below the annual increase of 3.3 percent in June.
For months, the cooling of inflation has been providing gradual relief for American consumers, who suffered three years ago from price spikes, especially for food, gasoline, rent and other essential goods. Inflation peaked two years ago at 9.1 percent, the highest level in four decades.
Inflation has played a central role in the presidential election, with former President Donald Trump blaming the Biden administration’s energy policies for the price spikes. Vice President Kamala Harris said Saturday she would soon unveil new proposals to “reduce costs and also strengthen the economy overall.”
Food prices are likely to have remained largely unchanged from June to July, say economists at UBS. Last year, food prices rose by just 1.1 percent. Nevertheless, food costs have risen by around 21 percent in the last three years, putting a strain on the budgets of many families.
Fed Chairman Jerome Powell has said he is looking for more evidence of easing inflation before the Fed begins cutting its benchmark interest rate. Economists generally expect the Fed’s first rate cut to come in mid-September.
When the Federal Reserve lowers its benchmark interest rate, it tends to lower borrowing costs for consumers and businesses over time. Mortgage rates have already fallen in anticipation of the Fed’s first rate cut.
At a press conference last month, Powell said cooler inflation data this spring had boosted the Fed’s confidence that price increases would fall to an annual pace of 2%. Inflation was low in May and overall consumer prices fell 0.1% in June – the first decline in four years.
“It’s only a matter of time before we see more good data,” Powell said. Another inflation report will be released next month, ahead of the Fed’s Sept. 17-18 meeting. Economists expect that report, too, to show that price increases have remained largely moderate.
Raphael Bostic, president of the Fed’s Atlanta branch, was more explicit about interest rate cuts on Tuesday:
“Yes, it’s coming,” Bostic said in Atlanta at the African-American Financial Professionals Conference. “I want to see some more data. … We need to make sure the trend is real … but it’s coming.”
Inflation has eased sharply over the past two years as global supply chains have been repaired, a wave of housing construction has driven down rents in many major cities, and higher interest rates have slowed auto sales, forcing dealers to offer better deals to potential car buyers.
Consumers, especially those on low incomes, are also becoming more price-conscious and are foregoing high-priced products or turning to cheaper alternatives. This has forced many companies to curb their price increases or even offer lower prices.
Prices for some services, including auto insurance and health care, are still rising sharply. Auto insurance costs have skyrocketed as the value of new and used vehicles has risen sharply compared with three years ago. But economists expect those costs to eventually rise at a slower pace.
As inflation continues to fall, the Fed is paying increasing attention to the labor market. The central bank’s goals, as defined by Congress, are to keep prices stable and support maximum employment.
This month, the government reported that hiring fell much more than expected in July and that the unemployment rate rose for the fourth month in a row, but still at a low 4.3%. The figures roiled financial markets and caused many economists to revise upward their forecasts for rate cuts this year. Most analysts now expect at least three quarter-percentage-point rate cuts at Fed meetings in September, November and December. The Fed’s benchmark interest rate is at a 23-year high of 5.3%.
Nevertheless, the increase in the unemployment rate is mainly due to the influx of job seekers, especially new immigrants who did not find work immediately and were therefore classified as unemployed. This is a much more positive reason for a higher unemployment rate than if it had been caused by an increase in layoffs. Job reduction measures remain low.
On Thursday, the government will release its latest retail sales data, which is expected to show that consumers increased their spending slightly in July. As long as shoppers are willing to spend, businesses are likely to retain their employees and may even hire additional staff.
