Inflation Picks Up, but Details

Under the Surface Are

Encouraging
Economists looked past the first acceleration in overall inflation in more than a
year and saw signs that price pressures continued to moderate in July.

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Chart showing the year-over-year percentage change in the consumer price index, which
was up 3.2 percent in July, and the index excluding food or energy, which was up 4.7
percent.
 +
14
%
+
 12
Inflation
+
10
+
8
+4.7% excluding
food and energy
+
6
+
4
+3.2% in July
+
2
0
–
2
1965
’70
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
Year-over-year change in the Consumer Price Index
Source: Bureau of Labor Statistics
By Karl Russell

By Jeanna Smialek
Aug. 10, 2023

Fresh inflation data offered the latest evidence that price increases were
meaningfully cooling, good news for consumers and policymakers alike more than
a year into the Federal Reserve’s campaign to slow the economy and wrestle cost
increases back under control.
 The Consumer Price Index climbed 3.2 percent in July from a year earlier,
according to a report released on Thursday. That was the first acceleration in 13
months, and followed a 3 percent reading in June.

But that tick up requires context. Inflation was rapid in June last year and slightly
slower the next month. That means that when this year’s numbers were measured
against 2022 readings, June looked lower and July appeared higher than if the
year-earlier figures had been more stable.

Economists were more keenly focused on another figure: the “core” inflation index,
which strips out volatile food and fuel prices. That picked up by 4.7 percent from
last July, down from 4.8 percent in June. And on a monthly basis, core inflation
roughly matched an encouragingly low pace from the previous month.
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The upshot was that inflation continued to show signs of seriously receding after
two years of rapid price increases that have bedeviled policymakers and burdened
shoppers — and the details of the July report offered positive hints for the future.
Rent prices have been moderating, a trend that is expected to persist in coming
months and that should help to weigh down inflation overall. An index that tracks
services prices outside of housing is picking up only slowly.

“This is continuing the kind of progress I think that you want to see,” said Omair
Sharif, the founder of Inflation Insights, a research firm.

Inflation F.A.Q.
Card 1 of 5
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar
will not go as far tomorrow as it did today. It is typically expressed as the annual change in
prices for everyday goods and services such as food, furniture, apparel, transportation and
toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can
also rise and fall based on developments that have little to do with economic conditions,
such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but
moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor
households because they spend a bigger chunk of their budgets on necessities like food,
housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks.
Financial assets in general have historically fared badly during inflation booms, while
tangible assets like houses have held their value better.
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Airfares fell sharply, and hotel costs eased last month. Big drops in those categories
may be difficult to sustain but are helping to limit price increases for now.

Used cars were also cheaper last month, a trend that some economists expect to
intensify in the months ahead, based on declines that have already materialized in
the wholesale market where dealers purchase cars.
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A bar chart showing the May-to-June changes in a selection of categories of the Consumer
Price Index, adjusted for seasonality. 16 of the 24 categories shown rose with fuel oil and
piped utility gas service topping the list at 3 percent and 2 percent. All items rose 2 tenths
of one percent while used cars and airline fares fell the most at negative 1.3 and 8.1 percent.
 Monthly changes in July
Fuel oil
+3.0
%
Piped utility gas service
+2.0
Motor vehicle insurance
+2.0
Motor vehicle maintenance and repair
+1.0
Meats, poultry, fish and eggs
+0.5
Dairy and related products
+0.5
Medical care commodities
+0.5
Tobacco and smoking products
+0.5
Fruits and vegetables
+0.4
Rent of primary residence
+0.4
All items
+0.2
Food away from home
+0.2
Gasoline (all types)
+0.2
All items less food and energy
+0.2
Physicians’ services
+0.2
Alcoholic beverages
+0.1
Cereals and bakery products
0
Nonalcoholic beverages
0
Apparel
0
New vehicles
–0.1
%
Hospital services
–0.4
Electricity
–0.7
Used cars and trucks
–1.3
Airline fares
–8.1
June-to-July changes in a selection of categories of the Consumer Price Index,
adjusted for seasonality.
Source: Bureau of Labor Statistics
By Karl Russell
The latest figures are likely to matter at the Fed, where officials are debating
whether and when to raise rates again this year to ensure that the economy slows
enough to guarantee that inflation fully returns to normal.
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Policymakers have raised the benchmark rate to a range of 5.25 to 5.5 percent, up
from near zero in March last year. Higher rates make it more expensive to borrow
to buy a house or afford a car, with the goal of slowing growth and chipping away at
how much companies can raise prices.

Economists thought that the price data might make policymakers more
comfortable holding off on a rate move at their next meeting, on Sept. 20.

“There are a lot of seeds in this report that suggest more disinflation to come,” said
Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, a
research firm. “It probably means that we are at — or very close to — the peak on
interest rates.”

Still, Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said
in an interview with Yahoo Finance on Thursday that the fresh inflation data was
“not a data point that says victory is ours,” and kept the option of another rate
increase on the table.
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Even if it included positive news for the Fed, the July inflation report was harder
for the Biden administration to brag about, given the pickup in the headline
number. President Biden noted that the overall inflation rate had fallen since last
summer, and highlighted the decline in core inflation in July.

“Today’s report shows that our economy remains strong,” he said in a statement.
The Republican National Committee pointed out the uptick in overall inflation in
July, and said in a statement that the rate “remains more than double what it was
when Biden took office.”

There is a risk that the overall inflation gauge could stay higher into August. Gas
prices began to pick up at the end of July. Although the jump came too late to
matter much for that month’s report, it has persisted into August and could prop
up inflation in the next set of figures.

But Paul Ashworth, the chief North America economist at Capital Economics,
wrote that “other than triggering a rebound in airline fares via higher jet fuel prices,
we expect the knock-on impact” of higher fuel costs “to be pretty modest.”

Still, a big question about the future evolution of inflation lingers: Can it slow
sustainably without a more marked pullback in the broader economy? So far,
consumers continue to spend, wages continue to rise, and the job market remains
strong despite the Fed’s rate moves, all of which might keep demand strong and
prices increasing.
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Even amid the resilience, though, the trend toward relentlessly higher prices does
seem to be cracking.

Part of that owes to a return to normal after the pandemic. Messed-up supply
chains are healing, allowing prices for some goods to come down. Workers are
filling open jobs in service and production. Travel, which had plummeted before
surging back, is reaching a more stable growth pace.

And some companies are beginning to find that they cannot keep charging
customers more without losing them. Noodles & Company, the fast-casual
restaurant chain, raised prices 8 percent in the second quarter of 2022 and another
5 percent in early 2023. But as it did that, price-sensitive guests pulled back and
revenues fell.

The chain has been emphasizing cheaper bowls and a macaroni and cheese meal
deal to help lure diners back. It has not repeated a big price increase in mid-2023,
Mike Hynes, the firm’s chief financial officer, told analysts this week on an earnings
call.

“We have gained some good traction, winning guests back from a value
perspective,” he said. “But it’s going to take some time.”

Jim Tankersley contributed reporting.

Jeanna Smialek writes about the Federal Reserve and the economy for The Times. She
previously covered economics at Bloomberg News.  More about Jeanna Smialek

A version of this article appears in print on Aug. 11, 2023, Section B, Page 1 of the
New York edition with the headline: As Inflation Inches Up, Silver Lining Is
Emerging. Order Reprints | Today’s Paper | Subscribe
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