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As for inflation, the good news is that gas prices are falling. The bad news is that other costs continue to climb faster than wages, putting a strain on many family budgets across the country.
The Labor Department reported on Wednesday that annual inflation fell to 8.5% in July, from 9.1% the previous month. Falling gasoline prices offset the rising costs of other goods, leaving the consumer price index unchanged between June and July.
After reaching a record high of $5.01 per gallon in June, the average price of gasoline has fallen sharply, according to AAA, reaching $4.01 per gallon on Wednesday.
“Sure, it’s better than $5,” says Spencer Sutton of Newport, Pa. “But compared to what we paid before everything started with the war in Ukraine, it’s still a high cost.”
Sutton also worries about the high cost of groceries and especially housing. To save on expenses while the wife finishes nursing school, the couple moved in with her mother.
“As a 30-year-old millennial, I didn’t think I’d still be living with my mom, with my brother and his wife,” Sutton says. “It’s certainly not the most ideal arrangement, but with what’s going on in this day and age, you’ve got to do what you’ve got to do.”
Why you should consider core inflation
Housing costs – up 5.7% from a year ago – are a growing factor behind inflation. Rising rents and housing prices are reflected only gradually in Labor Department data, and these costs tend to be more persistent than volatile food and energy prices.
“It’s going in the wrong direction for the Federal Reserve,” said Diane Swonk, chief economist for KPMG. “We’re seeing some things come down in price out there, and that’s great. But the other shoe to drop is the core inflation number.”
Annual core inflation, which excludes volatile food and energy prices, held steady in July at 5.9%. Core prices rose just 0.3% between June and July – the smallest increase in ten months.
Investors welcomed signs that inflation may be easing. The Dow Jones Industrial Average rose more than 450 points in the first hour of trading. But prices are still rising faster than wages, which cuts down on workers’ purchasing power.
Penelope Valdespino switched this year from a retail job to a higher paying position in the school district in San Antonio, Texas. Her larger paycheck is quickly being swallowed up by rising prices.
“I eventually transferred to another job where yes, I’m going to get paid $3 or $4 more an hour,” she says. “That’s great, but catching up and keeping everything in order is still a challenge in this climate right now.”
Valdespino welcomes the drop in petrol prices, but says she is still careful to limit unnecessary car journeys. And she watches her pennies at the grocery store, where prices have jumped 13.1% from a year ago.
“We’re very careful about how much meat we buy,” she says.
Paychecks do not keep pace with inflation
Sutton, who works for a dental insurance company, also got a raise this year, but says the money doesn’t stretch as far as before.
“It wasn’t enough to fight inflation and rising food costs,” he says. “It’s tough to get to the end of the week before you get paid and you’re out of food and you’re digging out of the freezer to try and find something.”
Average wages in July were up 5.2% from a year ago – well below the rate of inflation.
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Higher wages also complicate the Federal Reserve’s efforts to fight inflation.
“We know how painful inflation is, especially for those who live paycheck to paycheck,” Fed Chairman Jerome Powell said last month.
The Fed is trying to get sky-high prices under control by aggressively raising interest rates in an attempt to dampen demand.
But the Fed’s task became more challenging after last week’s better-than-expected jobs report, which showed employers added 528,000 jobs last month.
“If these numbers are to be believed, we generated over half a million new paychecks in the month of July, which is a lot of additional income,” says KPMG’s Swonk. “Although individuals feel they are losing ground relative to inflation, the additional income supports demand,” keeping prices upward.
Before Wednesday’s inflation report, many observers expected the central bank to approve another, jumbo interest rate increase of 0.75 percentage points at its next meeting in September, corresponding to the interest rate increases in June and July. After the report, oddsmakers tilted towards a smaller interest rate increase of 0.5 percentage points.
There is another benefit of falling gas prices
The sharp fall in petrol prices may help to curb inflation in another way.
Falling prices at the pump not only reduced July’s headline inflation rate, but also appeared to ease people’s worries about future inflation.
That’s important because if people believe that prices will continue to climb out of control, it can become a self-fulfilling prophecy.
A new survey from the Federal Reserve Bank of New York shows that people’s expectations of inflation one and three years ahead fell sharply between June and July, just as gas prices were falling.
Swonk says gas prices have a big impact on people’s attitudes about the economy, even though other expenses like food and rent make up a larger portion of the typical household budget.
“Even if you don’t drive, you walk or drive by a gas station,” says Swonk. “It’s something we all notice, front and center, every day.”