Inflation likely remained low last month as Federal Reserve moves closer to rate cut

WASHINGTON — If the Federal Reserve needs further proof that the worst price rally in four decades is gradually easing, it will likely come Wednesday, when the government is expected to report that inflation slowed further last month.

Consumer prices rose just 0.2% from June to July, according to economists surveyed by FactSet, a pace 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, so-called core prices are also expected to have risen 0.2% from June and 3.2% from 12 months earlier, just below the 3.3% annual increase recorded in June.

For months, slowing inflation has provided gradual relief to American consumers, who were hurt by price increases three years ago, including for food, gasoline, rent and other necessities. Inflation peaked two years ago at 9.1%, its highest level in four decades.

Inflation played a central role in the presidential election, with former President Donald Trump blaming the Biden administration’s energy policies for soaring prices. Vice President Kamala Harris said Saturday she would soon unveil new proposals to “reduce costs and strengthen the economy overall.”

According to UBS economists, food prices are expected to remain broadly unchanged from June to July. Over the past year, food prices have only increased by 1.1 percent. However, the cost of food has increased by around 21 percent over the past three years, which is putting a strain on the budgets of many families.

Fed Chairman Jerome Powell said he was looking for more evidence of slowing inflation before the Fed begins lowering its benchmark rate. Economists widely expect the first rate cut to come in mid-September.

When the central bank cuts its policy rate, it tends to reduce the cost of borrowing 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 weaker inflation data in the spring had bolstered the Fed’s confidence that price increases would return to a 2% annual pace. Inflation was low in May, and consumer prices fell 0.1% overall in June, the first decline in four years.

“It’s just a matter of seeing more positive data,” Powell said. Another inflation report will be released next month, before the Fed meets on Sept. 17-18. Economists expect that report to also show that price increases have remained broadly subdued.

Raphael Bostic, president of the Fed’s Atlanta branch, was more explicit about the rate cuts in his remarks Tuesday:

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

Inflation has fallen sharply over the past two years, thanks to the repair of global supply chains, massive apartment construction in many major cities that has driven down rental costs, and rising interest rates that have slowed auto sales, forcing dealers to offer better deals to potential car buyers.

Consumers, especially those on lower incomes, are also becoming more price-sensitive, forgoing big-ticket items or switching to cheaper alternatives. This has forced many companies to limit price increases or even offer lower prices.

Prices for some services continue to rise sharply, including auto insurance and health care. Auto insurance costs have soared because the value of new and used vehicles has risen compared to three years ago. Economists, however, expect these costs to rise more slowly.

As inflation continues to decline, the Fed is paying increasing attention to the labor market. The central bank’s goals, as set by Congress, are to maintain price stability and support employment as much as possible.

This month, the government reported that hiring slowed much more than expected in July and that the unemployment rate rose for the fourth straight month, but still to a low 4.3%. The data rattled financial markets and led 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 September, November and December meetings. The Fed’s benchmark rate is at 5.3%, its highest level in 23 years.

The increase in the unemployment rate, however, is mainly the result of an influx of job seekers, particularly new immigrants, who did not immediately find work and were therefore classified as unemployed. This is a much more positive reason for a higher unemployment rate than if it were due to an increase in layoffs. Job cuts remain low.

On Thursday, the government will release its latest data on retail sales, which are expected to show that consumers increased their spending modestly in July. As long as consumers are willing to spend, businesses are likely to retain employees and may even hire more.