Inflation Saw a Smaller-Than-Expected Increase in July

August 10, 2023

Inflation continues to loosen its grip on the U.S. economy. The consumer price index (CPI) was up by a seasonally adjusted 0.2% in July from the month before, in line with estimates from Dow Jones. On an annual basis, CPI was up 3.2%. While this is an acceleration from June’s year-over-year increase, the first such increase in more than a year, it was still below the 3.3% forecasters had been expecting.

The “core” CPI, which removes volatile components like food and energy and is considered a better indicator of future inflationary pressures, also increased by 0.2% on a monthly basis, coming in line with expectations. The annual rate for core CPI was 4.7%. That is below Dow Jones expectations and the lowest annual core CPI reading since October 2021. 

The slight acceleration in annual inflation was influenced by what happened in July of 2022, which serves as the basis for comparison. Economists do not expect the annual rate of inflation to slow much more this year, in part because of what is known as the base effect. Essentially, comparing this year’s data to data from the same month a year earlier tells us more about the past than the present. Inflation was spiking this time last year, so using that elevated level as a point of comparison can skew year-over-year analyses.

The current analysis is further complicated by the CPI’s arcane methodology for calculating housing costs. There is a pronounced lag between current data and CPI data when it comes to shelter costs. Almost all of the monthly inflation increase came from shelter costs, which rose 0.4% and were up 7.7% from a year ago. The Bureau of Labor Statistics said that more than 90% of the month’s CPI increase came from shelter costs. More real-time data has shown a downturn in housing costs, which will continue to work its way through CPI calculations.

While the report shows somewhat mixed data, the downturn may be enough to give the Fed room to hold interest rates steady at their September meeting.

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