Inflation arrows pointing down: CPI dips below 3% for first time in over three years

(TND) — A popular measure of inflation dipped below 3% for the first time since March 2021.

The July consumer price index, released Wednesday by the Labor Department, was up 2.9% from last year.

That’s a far cry from the 9.1% peak of annual inflation in June 2022.

The CPI remains above the Federal Reserve’s long-term target of 2% inflation, but all signs point to an interest rate cut next month with price pressures on American households easing.

“Nothing's ever 100%, but we're as close to a certain rate decrease as we can be,” Colorado State University economist Stephan Weiler said.

Weiler said shelter and motor vehicle insurance are stubbornly problematic areas of inflation but not enough to stop the Fed from cutting rates.

Those are more so reasons inflation isn’t even lower, he said.

Shelter was up about 5% compared to last year, the new CPI report shows.

The index for shelter rose 0.4% in July, accounting for nearly 90% of the monthly increase in the overall CPI.

Food prices are up 2.2% over the last year.

Gas prices are down 2.2%.

The Fed’s preferred measure of inflation, the personal consumption expenditures price index, is now 2.5%.

The CPI measures a constant basket of goods over time.

The PCE is a more accurate and better reflection of what Americans are really consuming because it accounts for different choices in a period of high prices, Weiler said.

Despite substantial cooling, inflation will still be a big issue for voters this November, said Peter Loge, the director of the School of Media and Public Affairs at George Washington University.

“I think the inflation argument still has stickiness, in part because we don't experience the economy. We buy gas and groceries. And gas and groceries cost a lot of money,” Loge said.

Wage growth is now outpacing the rate of inflation, but Americans are dealing with the cumulative impact of month after month of higher prices.

The CPI is up 23% in the last five years.

Groceries cost 27% more on the whole than they did back in July 2019.

Pay – private sector average hourly earnings – is up 3.6% in the last year and up 25% in the last five years.

The Fed raised its benchmark interest rate 11 times beginning in early 2022 as a lever to tame inflation. That rate now sits in a range of 5.25% to 5.5%.

The Fed doesn’t set the interest rates consumers are most familiar with, such as those for homes and cars. But the Fed's actions do influence all other borrowing rates.

“Generally, the rate-cutting cycle is not one-and-done. Six to eight rounds of rate cuts all through 2025 look likely. Whoever sits in the White House in 2025 will see lower interest rates. However, a super-sized budget deficit could limit the decline in mortgage rates,” National Association of Realtors Chief Economist Lawrence Yun said in a statement. “More government borrowing means less mortgage money to lend. The new normal for mortgage rates will be around 6% and definitely not to 4% as was before COVID.”

The Fed has a dual mandate to foster maximum employment and low inflation.

The U.S. economy added 114,000 jobs last month, which was the second-lowest total in the last year.

And the unemployment rate went up to 4.3%.

Until May, the unemployment rate was riding a sub-4% streak of two straight years.

Weiler said the jobs market is still growing at nearly replacement rate.

But the unemployment rate has gone up pretty steadily.

And he’s concerned that there are 1.5 million long-term unemployed Americans.

“That's a pretty sizable number,” he said.

Weiler said he doesn’t see any evidence we’re heading towards a recession, but the labor market is showing enough weakness that he could see the Fed going with a more aggressive 50 basis-point cut, as opposed to a more conservative 25 basis-point cut.

“I think the betting is beginning to get on to 50, just because I think that they are worried that they may have overdone it on the labor market,” he said.

Fed officials will meet for their annual economic policy symposium in Jackson Hole, Wyoming, at the end of this month.

Weiler said the Fed will probably withhold any rate cuts until its scheduled meeting Sept. 17-18, but he said he wouldn’t be shocked if a rate cut is announced following the Jackson Hole summit if the markets get “fidgety.”