U.S. inflation eased slightly but remained close to a four-decade high in July despite cooling energy prices.
The Labor Department on Wednesday reported that the consumer-price index rose 8.5% in July from the same month a year ago, down from 9.1% in June. June marked the fastest pace of inflation since November 1981. The CPI measures what consumers pay for goods and services.
Core CPI, which excludes often volatile energy and food prices, held steady in July, increasing 5.9% from the same month a year ago, a sign that broad price pressures remain in the economy.
Stocks rallied after the data. The Dow Jones Industrial Average, S&P 500 and Nasdaq all opened higher. Yields on U.S. Treasurys fell.
On a monthly basis, the CPI was flat in July after rising 1.3% the prior month, the result of falling energy prices such as gasoline. The core-price index climbed 0.3% last month, down sharply from June’s 0.7% gain, but slightly higher than the average monthly gain of 0.2% in the two years before the pandemic.
Price pressures eased across energy categories, with gasoline down 7.7% in July from the prior month. Used car prices, up sharply earlier in the pandemic, also dropped on a month-to-month basis, as did airline fares and apparel. Grocery prices were up 1.3% in July from the prior month and rose 13.1% in July from a year ago, the fastest annual pace since 1979. Dining out costs also rose.
Rapidly rising prices have become persistent following a surge in inflation from goods, energy and food, said Greg Daco, chief economist for EY-Parthenon, a consulting firm.
“That divergent trend shows there’s a breadth of inflation in that housing inflation and service-sector inflation remain elevated,” he said, adding price pressures in those areas could linger. “And those tend to be stickier than goods, which can and will start to reverse.”
Elevated inflation is the byproduct of rapid growth as the U.S. rebounded from the Covid-19 pandemic, fueled in part by lower interest rates and government stimulus. The Federal Reserve faces the challenge of tightening monetary policy to cool the hot labor market and slow demand enough to curb inflation, but not enough to set off a recession.
Fed officials lifted interest rates in both June and July, and will meet again in September to consider a further increase. Fed Chairman Jerome Powell has said the central bank wants to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.
“Even if headline inflation slows on account of weaker energy prices but core inflation is stubbornly high, the Fed is likely to maintain its tightening bias as it will be concerned about high inflation being entrenched in consumer price expectations,” said Blerina Uruci, U.S. economist at T. Rowe Price Group Inc.