Consumer prices fell in July and wages rose even when adjusting for inflation, according to data released Friday by the Bureau of Economic Analysis.
The personal consumption expenditures (PCE) price index — the Federal Reserve’s preferred gauge of inflation — fell 0.1 percent in July and rose just 0.1 percent when stripping out food and energy prices.
The PCE index was up 6.3 percent in July from the same month one year ago, down sharply from the 6.8 percent annual inflation rate in June. Annual inflation without food and energy prices, also known as core inflation, fell from 4.8 percent in June to 4.6 percent in July.
“U.S. consumers received a welcome reprieve from the sting of inflation in July, as gas prices dropped significantly. But at over 6%, inflation still remains much too high to provide any lasting comfort,” said Scott Brave, consumer spending economist at Morning Consult, in a Friday analysis.
Much of the July dip in inflation came from a steep decline in gasoline prices, reversing a staggering June spike in oil prices that pushed the average cost of a gallon of gasoline above $5 in the previous month. Prices for energy-related goods and services fell 4.8 percent in July after rising 7.5 percent in June, according to the PCE index.
While prices for most goods ticked downward in July, food prices continued to climb with a 1.3 percent increase last month. Prices for food were almost 12 percent higher in July than in the same month in 2021.
Even so, the broader dip in consumer prices helped incomes rise 0.2 percent on the month. Disposable income adjusted for inflation also rose 0.3 percent after falling 0.2 percent in June, which BEA pinned primarily on wages rising faster than inflation last month.
Easing inflation would be a major boost to the Federal Reserve’s efforts to bring down price increases without stoking a recession. Top Fed officials have pledged to keep raising interest rates high enough to ensure inflation comes back down toward their 2 percent annual target, even if it means pushing unemployment higher.
If inflation continues to fall, the Fed may be able to pause its planned series of interest rates hikes soon enough to preserve a strong job market and resilient consumer spending. The bank has already raised its baseline interest rate range to 2.25 to 2.5 percent and Fed officials expect to raise it by at least 1 percentage point before the end of the year.
“The weaker July inflation data plus signs of further healing of supply chains should take some pressure off the Fed in coming months,” writes Ayers. “At least a 50 basis point increase in the Fed funds rate is still expected in September, but rate increases are likely to be more modest (or even pause) later this year,” wrote Ben Ayers, senior economist at Nationwide, in a Friday analysis.
The inflation dip is also welcome news for President Biden and Democrats, who are seeking to retain control of Congress amid the highest annual price growth in more than four decades.
“We have more work to do. We have to help families who have been squeezed by decades living paycheck to paycheck. But today confirms that our economic plan is building the economy from the bottom up and the middle out and we are making progress,” Biden said in a Friday statement.
Updated at 10:02 a.m.