Inflation slows a bit in July. Has it finally peaked?

After months of steadily rising to a 40-year high, the pace of inflation slowed noticeably in July as gasoline prices fell sharply and Americans got some relief from the cost of clothing, cars and other necessities.

The annual inflation rate, as measured by the consumer price index, fell to 8.5% in July from 9.1% in June, according to the Bureau of Labor Statistics in a report released on Wednesday.

The June inflation figure, the highest since November 1981, now looks like it was the peak of the price surge that began in spring 2021.

If inflation continues to fall slowly but steadily – which most economists now think is likely – it will be particularly welcomed by middle-class and low-income households, who spend much of their income on staples like clothing and fuel.

And the slowing of inflation couldn’t be more welcome to the Biden administration and other Democrats, who are plagued by fears that voter anger over the continued rise in the cost of living would spell disaster in the election.

These political fears were all the greater as inflation had not only wiped out recent wage gains but had swept through Americans, lulled by decades of near-stagnant prices for most goods and services.

This period of price stability was highly unusual in the long history of the US economy, but it lasted so long that many Americans took it for granted.

The sudden resurgence of inflation has largely eclipsed positive news about the economy over the past year, including the quick and robust recovery from the pandemic and a burst of wage increases after years of earnings stagnation for all but the highest-paid workers.

Dissatisfaction with inflation has been widely credited as one of the main reasons for Biden’s low approval ratings.

The July inflation report follows other recent positive developments including falling gas prices, robust job growth and a rebound in stock markets.

Democrats have also had some legislative victories in recent weeks, including the expected passage later this week of a key bill on things like tackling climate change and controlling drug prices.

Whether that will make a difference in the midterm election remains to be seen, but people’s perception of the economy is often seen through the lens of their partisan leanings and tends to be burned into their voting decisions by the end of the summer, according to political scientists.

Regardless of how one views the US economy, there is no question that inflation is the number one economic challenge facing policymakers, business leaders and consumers right now.

And Wednesday’s report, encouraging as it was, is unlikely to change the Federal Reserve’s plan to raise interest rates further, especially given the still-hot job market.

Moody’s Analytics, a research and forecasting company, is forecasting inflation to fall to 6.5% by the end of the year.

That’s a big drop statistically, but inflation is unlikely to return anywhere near the Fed’s 2% target well into 2024. And their forecasts are based on favorable outcomes related to the course of the pandemic; the economic consequences of the Russian invasion of Ukraine; and the Fed’s calibration of monetary policy, said Mark Zandi, Moody’s chief economist.

The Fed has raised its short-term interest rate four times in a row this year, the last two by a whopping 0.75 percentage point each. Another similarly large rate hike could come in September.

“Although the worst may be behind us, the central bank has years of hard work ahead of it, and the goal of restoring price stability could lead to a recession next year,” said Joseph Brusuelas, principal and chief economist at accounting firm RSM.

One of the Fed’s main goals in raising rates is to cool the labor market and prevent a wage spiral from taking effect and reigniting inflationary pressures.

While the unemployment rate returned to a pre-pandemic 50-year low of 3.5% last month, statistics suggest that average wage growth may also have peaked at around 5%.

There are signs that more companies are laying off workers in technology and interest rate-sensitive sectors such as finance and housing. And workers seem reluctant to change jobs in search of better pay and benefits.

The same concerns are expected to prompt households to rein in spending and reduce demand, which has surged over the past year as consumers, awash with cash from government stimulus reviews and booming asset prices, have been eager to remodeling their kitchens or buying entertainment systems or in – home fitness equipment.

That had helped glue supply chains together, but some of the biggest logistical issues have eased recently. Backlogs on cargo ships in Southern California, for example, have been falling for six straight months, and pressures on other modes of transportation are also easing, Oxford Economics said in a research report.

At the same time, commodity prices fell by an average of 8% in July, Oxford Economics said, although a fall in inflation at the producer level is far from widespread or even remote.

Greg Danenhauer, co-owner of Parker Boiler Co., a manufacturer that employs 70 people in the commercial city, said he sees little relief in the prices and delivery times of key materials and parts, including steel, pumps and valves.

Aside from wood, he said, “we don’t see it yet, but we’re hoping for it.”

More consumer goods manufacturers and retailers, including Walmart, have already begun cutting prices, or at least suppressing price hikes, to postpone rising inventories.

For consumers, the most noticeable – and benign – inflation trend over the past month is what they pay at gas stations.

Nationally, a gallon of regular gasoline jumped to a record high of $5.02 on June 14, but has since fallen to just over $4, according to the American Automobile Assn. In California, it has fallen to around $5.40 from a peak of $6.44 in mid-June.

This reflects lower crude prices as more supply has come online, including Biden’s release of strategic reserves, and as slower global growth has dampened demand. Fears of harsh European energy sanctions against Russia have also eased, which in turn has eased fears of next winter’s fuel shortages.

Prices are likely to remain volatile, but for now almost everyone is taking some comfort from the sharp drop at the pumps — perhaps Biden in particular.

The president’s public rating for his handling of the economy remains low, but there is one segment of this category that saw a slight rebound in July.

According to an ABC New/Ipsos poll last weekend, 34% of Americans said they approve of Biden’s handling of gas prices — seven points up from early June. Inflation slows a bit in July. Has it finally peaked?

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