Why lower gas prices don’t ease inflation:

A driver pumps gas at a Gulf gas station in Lynnfield, Massachusetts on July 19. Gasoline prices are falling, helping to lower inflation. But the cost of many other things continues to rise.

Joseph Prezioso/- via Getty Images

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Joseph Prezioso/- via Getty Images

Why lower gas prices dont ease inflation

A driver pumps gas at a Gulf gas station in Lynnfield, Massachusetts on July 19. Gasoline prices are falling, helping to lower inflation. But the cost of many other things continues to rise.

Joseph Prezioso/- via Getty Images

When it comes to inflation, the good news is that gas prices are falling. The bad news is that other costs continue to rise faster than wages, straining the budgets of many families across the country.

The Labor Department reported on Wednesday that annual inflation fell to 8.5% in July from 9.1% the previous month, thanks in part to a sharp drop in gasoline prices.

At the same time, lower prices at the pump left the consumer price index unchanged between June and July. Average gasoline prices hit $4.01 a gallon on Wednesday, according to AAA, down sharply from a June 14 record high of $5.01 a gallon.

While it’s a relief, Americans still feel pressured by rising prices for other goods and services.

“Of course it’s better than $5,” says Spencer Sutton of Newport, Pennsylvania, of today’s lower gas prices. “But compared to what we were paying before it all started with the war in Ukraine, it’s still a high cost.”

Sutton is also worried about the high cost of groceries and especially housing. To save on expenses while his wife completes nursing school, the couple moved in with her mother.

“As a 30-year-old millennial, I didn’t think I would still be living with my mom, with my brother and my wife,” Sutton said. “It’s certainly not the most ideal arrangement, but with what’s going on these days, you gotta do what you gotta do.”

Housing prices continue to rise

Housing costs – up 5.7% from a year ago – are a growing driver of inflation. Rising rents and house prices are only gradually reflected in Labor Department data, and these costs tend to be more persistent than food and energy price volatility.

“This is going in the wrong direction for the Federal Reserve,” says Diane Swonk, chief economist at KPMG.

Core annual inflation, which excludes volatility in food and energy prices, remained stable in July at 5.9%.

But core prices rose just 0.3% between June and July – the smallest increase in ten months. Investors welcomed the sign that inflation might slow. The Dow Jones Industrial Average rose more than 450 points in the first hour of trading.

Yet prices are rising faster than wages, reducing the purchasing power of workers.

Penelope Valdespino moved this year from a retail job to a better-paying position in the school district of San Antonio, Texas. However, his higher salary is quickly swallowed up by rising prices.

“I finally changed jobs where yes, I’m going to be paid $3 or $4 more an hour,” she says. “It’s great, but catching up and keeping everything in order is always a challenge in this climate right now.”

Valdespino welcomes lower gas prices, but says she’s still careful to limit unnecessary car trips. And she’s watching her pennies at the grocery store, where prices jumped 13.1% from a year ago.

“We are very careful about the amount of meat we buy,” she says.

Salaries do not keep up with inflation

Sutton, who works for a dental insurance company, also got a raise this year, but says the money doesn’t stretch as far as it used to.

“It wasn’t enough to fight inflation and the rising cost of food,” he says. “It’s hard to get to the end of the week before you get paid and you’re out of food and you come out of the freezer trying to find something.”

Average wages in July rose 5.2% from a year ago, well below the rate of inflation.

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New residential units are under construction in Los Angeles on August 4. San Francisco and Los Angeles ranked first and second in the United States for net outflows amid high housing prices and high living costs, according to a Redfin report in July.

Mario Tama/Getty Images

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1660146165 313 Why lower gas prices dont ease inflation

New residential units are under construction in Los Angeles on August 4. San Francisco and Los Angeles ranked first and second in the United States for net outflows amid high housing prices and high living costs, according to a Redfin report in July.

Mario Tama/Getty Images

Higher wages also complicate the Federal Reserve’s efforts to fight inflation.

“We know how painful inflation is, especially for those who live paycheck to paycheck,” Fed Chairman Jerome Powell said last month.

The Fed is trying to rein in soaring prices by aggressively raising interest rates in an effort to dampen demand.

But the Fed’s task became more difficult after last week’s better-than-expected labor market report, which showed employers added 528,000 jobs last month.

“If these numbers are to be believed, we generated over half a million new paychecks in the month of July, which is a lot of additional revenue,” KPMG’s Swonk said. “Even if individuals feel they are losing ground to inflation, this extra income is supporting demand,” maintaining upward pressure on prices.

Ahead of Wednesday’s inflation report, many observers expected the central bank to approve another massive interest rate hike of 0.75 percentage points at its next meeting in September, matching the hikes rates in June and July. After the report, bettors tilted for a lower rate increase of 0.5 percentage points.

Lower gasoline prices have another benefit

The sharp decline in gasoline prices could help curb inflation in another way.

Falling prices at the pump not only lowered July’s headline inflation rate, but also seemed to ease people’s concerns about coming inflation.

This is important because if people believe that prices will continue to climb out of control, it can become a self-fulfilling prophecy.

A new survey from the Federal Reserve Bank of New York finds that people’s expectations for inflation one to three years ahead fell sharply between June and July, just as gasoline prices were falling.

Swonk says gas prices have an outsized impact on people’s attitudes toward the economy, even though other expenses like food and rent take up a bigger chunk of a budget. typical household.

“Even if you’re not driving, you’re walking or passing a gas station,” Swonk says. “It’s something we all notice, front and center, every day.”

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