A small part of the incipient slowdown in consumer prices could also be linked to the Fed’s rapid interest rate increases this year, which are aimed at cooling consumer demand and slowing business expansion. Central bankers have hiked interest rates since March and raised them by three-quarters of a percentage point in each of their last two meetings, an unusually fast pace of increases that has made the campaign the fastest in the Fed to constrain the economy since the 1980s.
Used car prices fell in July, which could be partly explained by higher borrowing costs. Mortgage rates have skyrocketed this year and appear to be weighing on the housing market, which could help lower appliance prices.
But a Fed-induced cooling is not yet the main story. Job gains remain robust, even as companies like Amazon and Alphabet, Google’s parent company, watch the economic outlook and slow hiring with suspicion. Wages continue to rise rapidly, and in doing so, the prices of many services are also rising. Rents, which account for a large part of headline inflation and are closely linked to wage growth, continue to climb rapidly – which is concerning, as they tend to change course only slowly.
Rent for the primary residence rose 0.7% in July from the previous month and 6.3% over the past year. Before the pandemic, this metric typically climbed about 3.5% per year.
These forces could keep inflation at an undesirable speed even as supply chains run amok and fuel prices continue to fall. The Fed is targeting 2% inflation over time, based on a different but related measure of inflation.
Understanding inflation and how it affects you
“Covid reopening and revenge travel pressures have eased — and will likely continue to ease,” said Laura Rosner-Warburton, senior US economist at MacroPolicy Perspectives. But she also cautioned, adding that “under the hood we are still seeing rent pressures. There is still sticky inflation here.