Year-over-year inflation in the U.S. reached its lowest level in more than three years last month.
The drop signals a cooling of prices pressures and potentially paves the way for the Federal Reserve to begin cutting interest rates in September.
The big picture: Consumer prices rose only 0.2% from June to July, with core inflation hitting the lowest level since April 2021.
- Overall, prices rose 2.9 percent from the year before, down from three percent in June, making it the lowest year-over-year inflation number since March 2021.
- The government attributes most of July’s inflation to higher rental prices and other housing costs, which are gradually easing. As a result, housing costs are expected to rise more slowly in the coming months, contributing to lower inflation.
Go deeper: Grocery prices rose just 0.1 percent in July and are 1.1 percent higher than a year earlier, indicating a slower pace of growth compared to previous years. However, food prices remain 21 percent higher than three years ago, despite average wage increases.
- Gas prices remained unchanged from June to July and have fallen 2.2 percent in the past year. Clothing prices and both new and used car prices also dropped in July.
- Some food prices, particularly for meat, fish, and eggs, are still increasing faster than before the pandemic, while dairy and fruit and vegetable prices fell in July.
What we’re watching: As inflation continues to decline, the Fed is also closely monitoring the job market to support maximum employment.
- July’s hiring data showed slower-than-expected job growth, leading economists to revise their forecasts for interest rate cuts.
- Analysts now expect at least three quarter-point rate cuts in September, November, and December. The Fed’s benchmark rate is currently at a 23-year high of 5.3 percent.
