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July Inflation Rate Rises 3.2%, First Increase After Year of Decreasing Prices

Inflation increased by 3.2% in July, marking the first uptick after 12 consecutive months of cooling prices. The Consumer Price Index, which tracks the prices of goods and services commonly bought by consumers, grew by 0.2% in July, the same as in June, according to the Labor Department. This increase was slightly below the economists’ forecast of 3.3%. The core CPI, which excludes volatile fuel and food costs, rose 4.7% from a year ago.

“Overall, the underlying details of the July CPI inflation data are consistent with ongoing progress on disinflation,” said Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management. “Although core services inflation trended higher on the month, other component-level trends are evolving in line with our expectations.”

The first increase in the pace of inflation growth since June 2022 can be attributed partly to higher housing and food costs. However, economists believe that underlying pressures are easing and the economy is showing signs that price increases will continue to cool.

“In particular, rents and used car prices softened, alongside clothing and airfares,” added Gill.

The cost of shelter surged, accounting for 90% of the total increase, mainly due to a 7.7% rise on an annual basis. Additionally, the indexes for recreation, new vehicles, household furnishings and operations also increased. Vehicle insurance costs jumped to 2% in July after climbing 1.7% in June due to higher repair and replacement costs faced by insurance providers.

Despite the slight rise in inflation in July, Ed Moya, senior market analyst at OANDA, doesn’t believe it will disrupt the overall trend of declining prices over the past year. “There is a lot of optimism that we’re going to see that disinflation process remain intact,” said Moya.

On the other hand, some services and products experienced price declines. For instance, airline fares fell by 8.1% on a monthly basis, marking the fourth straight month of declines.

Looking ahead, Goldman Sachs economists predict that core CPI inflation will stay within the range of 0.2%-0.3%, thanks to higher levels of auto inventories that will drive down used car prices. They also anticipate a 10% year-over-year decrease in used car prices by December 2023.

The latest CPI report suggests that the Federal Reserve’s series of aggressive rate hikes have been insufficient in combating inflation. However, economists expect the Fed to pause on raising interest rates in September and November when inflation is expected to further decelerate. The consensus is that the Fed is done raising rates in this tightening cycle but won’t cut rates until early next year to ensure they win the inflation battle.

“Fed officials will likely look at the report as one more step down the disinflationary path,” said Lydia Boussour, senior economist at EY-Parthenon. She also mentioned that the Fed will keep the door open to further rate hikes if the data justifies it.

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