Inflation slowed again in July, allowing the Fed to start cutting interest rates

WASHINGTON (AP) — Year-over-year inflation hit its lowest level in more than three years in July, the latest sign that the worst price growth in four decades is fading and that the Federal Reserve is preparing to cut interest rates in September.

Wednesday’s Labor Department report showed consumer prices rose just 0.2% from June to July after falling slightly the previous month for the first time in four years. Measured year-over-year, prices rose 2.9%, compared with 3% in June. That was the lowest year-over-year inflation rate since March 2021.

The government said almost all of the increase in monthly inflation was due to increases in rents and other housing costs, a trend that was starting to ease, according to real-time data.

Inflation played a central role in the presidential election, with former President Donald Trump blaming the Biden administration’s energy policies for rising prices. 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 rose just 0.1% in July and are just 1.1% higher than a year earlier, a much slower pace of growth than in previous years. Still, many Americans are still struggling with food prices that remain 21% higher than they were three years ago, even though average wages have also risen sharply since then.

Gasoline prices were unchanged from June to July and are down 2.2% over the past year. Clothing prices also fell last month; they are almost unchanged from 12 months earlier. Prices for new and used cars also fell in July. Used car prices, which have soared during the pandemic, are down almost 11% over the past year.

Some food prices, including meat, fish and eggs, are rising faster than before the pandemic. But dairy, fruit and vegetable prices fell in July.

For nearly a year, lower inflation has provided 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.

Excluding volatile food and energy costs, so-called core prices rose a mild 0.2% from June to July, after rising 0.1% in the previous month. Core inflation slowed from 3.3% a year earlier to 3.2% — the lowest level since April 2021. Economists watch core prices closely because they typically give a better picture of where inflation is headed.

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 that cooler inflation data this spring had bolstered the Fed’s confidence that price increases were slowing to a 2% annual pace. 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.

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.