Cooler-than-expected inflation data for July fueled hopes that consumer prices peaked earlier this summer after a year of relentless increases that crushed Americans, created a political firestorm for President Biden and forced the Federal Reserve to raise interest rates at the fastest pace in several decades. .
The consumer price index rose 8.5% in July from the previous year, a bigger fall from the 9.1[ads1]% recorded in June than economists had estimated. On a monthly basis, the index did not move at all as reductions in oil, gas and airline prices offset increases in food and rent.
Excluding more volatile measures of food and petrol, prices rose 5.9% in July, corresponding to the previous month.
While the slowdown is likely to be a welcome respite for the Fed as it tries to wrestle inflation under control, experts warned that inflation remains painfully high and could slowly return to pre-pandemic levels around 2%.
INFLATION CONTINUES TO WIPE OUT THE WAGE GAIN OF AVERAGE AMERICANS
“We’re not out of the woods by a long shot,” said Peter Earle, a fellow at the nonprofit think tank American Institute for Economic Research. “There is a long way to go and a lot can happen before we get back to the 1.5% to 2.5% annual inflation range that Americans are used to.”
Whether inflation has truly peaked remains deeply uncertain, especially as COVID-19 and the Russian war in Ukraine continue to disrupt the global economy. Economists have previously predicted that the inflationary wave was peaking, only to be proven wrong the following month.
The expectation is, nevertheless, that the fiery pace of price increases will slow down in the coming months, although there may be a long decline back to “normal”.
JULY INFLATION BREAK: WHERE ARE RISING PRICES HITTING AMERICANS HARDEST?
“In a month or two, there will be clearer evidence that inflation has peaked, but also evidence that the decline is painfully slow,” said Seema Shah, chief strategist at Principal Global Investors. “Unfortunately, households will continue to feel the severe strain of elevated price pressures on their budgets, while persistent wage growth will weigh on corporate profit margins.”
Scorching inflation has created severe financial pressure for most American households, which are forced to pay more for daily necessities such as food and rent. The burden is borne disproportionately by low-income Americans whose already stretched paychecks are heavily impacted by price fluctuations.
Although American workers have seen strong wage gains in recent months, inflation has largely eroded them. Real average hourly earnings fell 0.5% in July from the previous month due to higher consumer prices, according to the Ministry of Labour. On an annual basis, real incomes actually fell by 3% in July.
“While the boost to the overall economic outlook is welcome, easing inflation will ring hollow with many downmarket consumers whose wages are falling in real terms despite the drop in petrol prices alone adding around $400 million back to household balance sheets,” said RSM chief economist Joe Brusuelas.
Despite a monthly decline in energy prices in July, Americans are still paying significantly more for gas (32.9%) than a year ago. Households are also facing rising food prices, which have risen a whopping 13.1% in the past year, the most significant increase since 1979, and increasingly steep rents, which are up 6.3%.
In fact, the average American is shelling out an extra $717 a month because of hottest inflation in decadesaccording to an analysis by the Joint Economic Committee Republicans.
“Although prices did not change from June to July 2022, prices increased 13.3% from January 2021 to July 2022, costing the average US household $717 in July 2022 alone,” the analysis said.
Even if prices stopped rising entirely, the inflation already taking place between August 2021 and July 2022 would cost the average American household an extra $8,607.
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President Biden, who has been on the defensive for months over soaring prices, hailed Wednesday’s cooler-than-expected report as evidence that inflation “may be starting to ease.” But Biden acknowledged that the fight against inflation may not be over yet.
“We may face further headwinds in the months ahead,” he said. — Our work is far from over.