Inflation Continues to Slow, Despite Rising Above 3 Percent Year-Over-Year

Inflation may be up, but it’s trending in the right direction–if slowly.

In July, the Consumer Price Index rose 0.2 percent again, just as in June, according to the U.S. Bureau of Labor Statistics. But year-over-year, inflation ticked up to 3.2 percent, rising above June’s 3 percent reading, which had been the lowest since March 2021.

This might look like a turn for the worse, but since that year-over-year number takes into account the inflation reading from 12 months prior, the full story is much more nuanced, economists say.  

Last year, oil prices were at an “extreme high” in the late spring and early summer but started to fall that July, says Wells Fargo senior economist Sarah House. It made this year’s recent year-over-year numbers up to July look more favorable, “probably overstating how quickly inflation is coming down,” House explains.  

But looking at July’s month-over-month numbers, progress remains “encouraging,” says Lydia Boussour, senior economist at EY-Parthenon.

The energy index decelerated from a 0.6 percent increase the previous month to 0.1 percent in July, and the food index ticked up slightly with a 0.2 percent increase in July after increasing 0.1 percent in June.

Crucially, core CPI–which takes volatile food and energy prices out of the equation–also continued to slow, increasing 0.2 percent again in July, and 4.7 percent year-over-year compared with 4.8 percent in June–though that’s still elevated.

This core reading matters to the Federal Reserve, economists say, as removing those more volatile indexes can paint a clearer picture of overall inflation. Thus, this slowdown could support a pause in rate hikes in September–bringing relief to business owners continuing to face higher borrowing costs.

“I think we are at a point where core inflation is downshifting in a meaningful way,” House says, pointing to the string of monthly increases 0.4 percent or more in the six months before June. 

Airline fares, used cars and trucks, medical care, and communication cost indexes decreased in July. But shelter was once again the biggest contributor to inflation, and to core CPI in particular, driving 90 percent of the increase compared with 70 percent last month. The indexes for motor vehicle insurance, education, and recreation also increased. 

Shelter falls under the services index, which the Fed will be paying particularly close attention to overall, Boussour says. Services also encompass medical care services and transportation services. 

“They want to see that [services] inflation slow down, and that’s going to happen as the labor market softens further,” Boussour says. That’s because industries in services are “more labor intensive,” she explains. A drop in services inflation–and an ease in the labor market–would thus bring the economy closer to the Fed’s goal. 

And on the labor front, there’s some good news: July brought the lowest number of jobs added in a jobs report since the beginning of 2023. That said, economists still deemed this a solid report overall, so a true softening could be a while off.  

Indeed, the July report from the National Federation of Independent Business shows that small-business owners continue to face competition for labor as well as inflationary pressures, as a net 25 percent of small businesses are hiking prices. However, that’s the lowest rate since January 2021–another instance of incremental progress. 

“Overall, we’re seeing upward pressure on inflation ebb,” House says, “but we have to remember that there’s still a ways to go before we get back to the Fed’s target on a sustained basis.”