Washing machines are prominently displayed at Sam’s Appliances TV & Furniture, located in Norwood, Massachusetts (AP Photo/Steven Senne, File). The United States is expected to experience a rise in inflation in July, marking the first increase in 12 months. This upward trend is primarily driven by the higher cost of gasoline, indicating that the battle against rising prices may become more challenging in the coming months. According to the anticipated inflation report to be released by the government on Thursday, consumer prices are predicted to have increased by 3.3 percent compared to the same period last year. This would signify a slight uptick from the 3 percent year-over-year increase observed in June, which was the lowest figure recorded in over two years. On a month-to-month basis, it is estimated that consumer prices have risen by 0.2 percent from June to July, the same rate as the previous month, as per a survey conducted by the data firm FactSet.
One major contributing factor to the higher inflation in July is the surge in energy prices, particularly gasoline. Over the past month, gasoline prices have spiked by nearly 30 cents, resulting in a national average of $3.83 per gallon, according to AAA. Excluding the volatile costs of food and energy, core prices are projected to show a 4.8 percent increase in July compared to the previous year, with a month-to-month increase of 0.2 percent, which remains unchanged from the previous month.
The upcoming inflation data on Thursday will be crucial in shaping the Federal Reserve’s decision regarding whether to continue raising interest rates. In its efforts to combat inflation, the Fed has already raised its benchmark rate 11 times since March 2022, reaching a 22-year high. These rate hikes have significantly slowed down the pace of price increases, with year-over-year inflation dropping consistently after reaching a four-decade high of 9.1 percent in June 2022. However, inflation still remains above the Fed’s target of 2 percent, and economists believe that the easy progress has likely already been made. While gasoline prices may fluctuate from month to month, they have already dropped from the peak national average of over $5 per gallon, which was recorded in June of the previous year following Russia’s invasion of Ukraine.
The inflationary surge experienced in 2021 was primarily caused by supply chain disruptions. Ports, factories, and freight yards were overwhelmed by the rapid economic rebound from the pandemic recession in 2020, resulting in delays, shortages of parts, and higher prices. However, supply chain backlogs have eased over the past year, significantly reducing upward pressure on the prices of goods. In fact, prices of durable manufactured goods decreased in June. The challenge now lies in persistent inflationary pressures faced by service businesses such as restaurants, hotels, and entertainment venues, where wages contribute significantly to costs. Many of these service companies have raised wages sharply due to worker shortages. To offset these higher labor costs, companies have typically increased their prices, thus fueling inflation.
Another factor that may hinder the continued decline in year-over-year inflation rates is the price surges observed in the first half of last year, followed by a slowdown in the second half. Therefore, any price increase in July would have the effect of boosting the year-over-year inflation rate. However, economists caution against reading too much into a single month of data, as many of them expect inflation to continue trending lower. Used car prices, for instance, which had skyrocketed after the pandemic, have started to decline, dropping by 5.1 percent in July compared to the same period last year, according to Edmunds.com. This decrease is attributed to a scarcity of new vehicles caused by a global computer-chip shortage in the peak of used-car price spikes. Now that automakers have been able to acquire more chips and produce more new vehicles, many shoppers who were forced to buy used vehicles are now back in the new-vehicle market. Although used-vehicle prices are expected to continue decreasing throughout the year, the reductions are likely to be more modest compared to July’s decline. It is unlikely that prices will return to pre-pandemic levels, with the average used vehicle currently costing 43 percent more than in January 2020 ($29,198).
Despite concerns over higher labor costs, the Labor Department’s employment cost index, a closely watched measure of wages and salaries, grew at a slower pace from April to June. Excluding government jobs, employee pay increased by 1 percent, less than the 1.2 percent growth observed in the first three months of 2023. Compared to the previous year, wages and salaries saw a growth rate of 4.6 percent, down from a 5.1 percent increase in the first quarter. Rents, which had surged after the pandemic, are also starting to stabilize. Researchers at the Federal Reserve Bank of San Francisco predict that year-over-year shelter inflation will continue to slow through late 2024 and may even become negative by mid-2024.
Economists like Thomas Simons, senior U.S. economist at Jefferies, anticipate further deceleration in inflation, even if there is a slight pickup this month. Looking towards the end of the year, Simons predicts that headline inflation will likely be closer to 2 percent, which is not a significant concern considering the high inflation experienced in the past two years and the relative tolerability of 2.5 percent inflation.
However, the Federal Reserve will closely analyze the data before deciding whether to continue raising rates. Thursday’s report is the first of two Consumer Price Index (CPI) numbers that policymakers will review before their next meeting scheduled for September 19-20. Additionally, the personal income expenditures price index, which is the Fed’s preferred inflation gauge, will be released on August 31. The August jobs report is also set to be released on September 1. Many economists and market analysts believe that the Fed’s most recent rate hike in July will likely be its final one, with nearly 87 percent of traders not expecting a Fed hike next month, according to the CME Group’s FedWatch Tool.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.