Inflation likely remained low last month as the Federal Reserve moves closer to cutting interest rates

WASHINGTON — If the Federal Reserve needs further evidence that the worst price rise in four decades is gradually easing, it will likely come Wednesday, when the administration is expected to report that inflation fell further last month.

Consumer prices are believed to have risen just 0.2% from June to July, according to economists surveyed by FactSet, a pace only slightly above the Fed’s 2% annual inflation target. Measured a year earlier, inflation is expected to remain at 3%, the same as in June.

Excluding volatile food and energy costs, core prices are expected to rise 0.2% from June and 3.2% from 12 months earlier, slightly below the 3.3% annual increase in June.

For months, falling inflation has provided a gradual relief to American consumers who have been hit by the price spikes that began three years ago, particularly for food, gasoline, rent and other necessities. Inflation peaked two years ago at 9.1%, the highest level in four decades.

Inflation played a key role in the presidential election, with former President Donald Trump blaming the Biden administration’s energy policies for price spikes. Vice President Kamala Harris said Saturday she will soon unveil new proposals to “bring down costs and also strengthen the economy as a whole.”

Grocery prices are expected to remain largely unchanged from June to July, according to economists at UBS. Food prices rose just 1.1% over the past year. Still, food costs have risen about 21% over the past three years, putting a strain on many family budgets.

Fed Chairman Jerome Powell said he was looking for additional evidence of a slowdown in inflation before the Fed began cutting its key interest rate. Economists widely expect the Fed’s first rate cut to come in mid-September.

When a central bank lowers its benchmark 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 news conference last month, Powell said cooler inflation data this spring had bolstered the Fed’s confidence that price increases were slowing to a 2% annual pace. Inflation was weak in May, and overall consumer prices fell 0.1% in June, the first decline in four years.

“It’s just a matter of seeing more good data,” Powell said. The next inflation report is due next month ahead of the Fed’s Sept. 17-18 meeting, and economists expect that report to also show that price increases remained mostly moderate.

Raphael Bostic, president of the Federal Reserve in Atlanta, spoke more specifically about the interest rate cuts in his speech on Tuesday:

“Yes, it’s coming,” Bostic said in Atlanta at the African American Financial Professionals conference. “I want to see a little more data. … We need to make sure that this trend is real … but it’s coming.”

Inflation has fallen significantly over the past two years, helped by repairs to global supply chains, a wave of housing construction in many major cities that has driven down rent costs, and higher interest rates that have slowed car sales, forcing dealers to offer potential car buyers better deals.

Consumers, especially those with lower incomes, are also becoming more price-sensitive, cutting out expensive products or switching to cheaper alternatives. This has forced many companies to limit price increases or even offer lower prices.

Prices for some services, including auto insurance and health care, continue to rise sharply. The cost of auto insurance has risen sharply as the value of new and used vehicles has risen from where they were three years ago. But economists expect those costs to eventually rise more slowly.

As inflation continues to fall, the Fed is turning its attention increasingly to the labor market. The central bank’s goals, as set by Congress, are to maintain stable prices and support maximum employment.

The government reported this month that hiring fell much more than expected in July and the unemployment rate rose for a fourth straight month, albeit to a still-low 4.3%. The data has stirred up turmoil in financial markets and prompted many economists to raise their forecasts for interest-rate cuts this year. Most analysts now expect at least three quarter-point rate cuts at the Fed’s meetings in September, November and December. The Fed’s benchmark rate is at a 23-year high of 5.3%.

Still, the rise in the unemployment rate largely reflected an influx of job seekers, especially new immigrants, who did not immediately find work and were classified as unemployed. This is a much more positive reason for the higher unemployment rate than if it had resulted from a jump in layoffs. Measures of job losses remain low.

On Thursday, the government will release the latest retail sales data, which is likely to show that consumers increased their spending slightly in July. As long as shoppers are willing to spend, businesses are likely to keep their staff and may even hire more.