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High Interest Rates Take Toll on Moderate Inflation in July Report

The latest inflation data has provided economists and policymakers with further evidence that price increases are significantly cooling. This is good news after more than a year since the Federal Reserve started its campaign to slow the economy and regain control over rising costs.

According to a report released on Thursday, the Consumer Price Index (CPI) rose by 3.2 percent in the year through July. This marks the first acceleration in 13 months and follows a 3 percent reading in June.

However, it is important to consider the context behind this pickup. Inflation was rapid in June of last year and slightly slower the following month. Therefore, when comparing this year’s numbers to the readings from 2022, June appeared lower and July appeared higher. If the year-ago figures had been more stable, the comparison would have looked different.

Economists are closely monitoring another figure known as the “core” inflation index, which excludes volatile food and fuel prices. This index increased by 4.7 percent over the past year, slightly down from 4.8 percent in June. On a monthly basis, core inflation only climbed by 0.2 percent, matching the low reading from the previous month.

The report suggests that inflation continues to cool, and there are positive signs for the future. Rent prices have been moderating, and this trend is expected to continue in the coming months, which should help keep inflation in check. Prices for services outside of housing are increasing at a slow pace.

“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. “Overall, this is pretty good news.”

Last month, airfares fell sharply, hotel costs eased, and used cars became cheaper. While sustaining significant drops in these categories may be challenging, they are currently helping to limit price increases.

The Federal Reserve will likely focus on the fresh inflation figures as officials consider whether inflation has slowed enough to halt further interest rate hikes. The benchmark interest rate has already been raised to a range of 5.25 to 5.5 percent from near zero in March last year. This increase has made borrowing to buy a house or afford a car more expensive. As the effects of the Fed’s actions ripple through the economy, they slow it down and constrain how much companies can raise their prices.

“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. We think we’re at the top.”

Officials are debating whether to raise rates again this year to ensure that the economy slows down sufficiently to bring inflation back to normal levels. Sharif believes that the fresh figures will make it easier for those who want to postpone a rate increase to argue their case at the Fed’s next meeting on September 20.

“They will have a lot of ammo to skip September, based on what the data are showing us right now,” he said.

While the July inflation report may be positive news for the Fed, it may be more challenging for the Biden administration to boast about, considering the increase in the headline number. Previous reports had shown a more widespread cooling.

There is a risk that the overall inflation rate could remain elevated in the next month. Gas prices began to increase towards the end of July. Although the impact was not significant for that month’s report, it has persisted into August and will likely contribute to inflation in the upcoming figures, which will be the last ones released before the Fed’s next decision on interest rates.

Paul Ashworth, the chief North America economist at Capital Economics, stated 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.” Altogether, he added, “there is nothing here to suggest the Fed needs to push ahead with further interest rate hikes this year.”

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