“I think inflation probably has peaked in year-over-year terms,” said Bill Adams, chief economist at Comerica Bank.
The Consumer Price Index is an aggregated snapshot of a wide array of goods and services Americans buy. In July, lower gas prices effectively canceled out higher prices for food and housing. Core inflation, which does not include volatile food and fuel components, rose 5.9% year-over-year, matching the increase seen in June.
The months’ worth of increases in the CPI poses a growing challenge for the Federal Reserve, which has committed to reining in soaring prices while trying to avoid plunging the economy into a recession.
“The Fed is already committed to a rate hike path,” said Ross Mayfield, investment strategy analyst at Baird. “The market is saying the Fed is closer to finished than they are to the beginning, [but] I’m not sure we’re quite there yet.”
What Americans are paying more for
Energy costs slowed for the month of July, falling 4.6%, although they remained 32.9% higher than a year before. Gasoline prices dropped by 7.7% month over month, providing some relief for drivers, but they were still 44% higher than the year before.
Price increases for new vehicles slowed a bit, rising 0.6% following last month’s rise of 0.7%. Used car and truck prices ticked down by 0.4%, and airline fares dropped by 7.8%.
The rate of increase in housing costs also moderated slightly, with the rise in overall shelter costs, rent and owners’ equivalent rent each down by a fraction of a percentage point from the previous month. However, shelter costs are still up 5.7% year over year.
The rising amount Americans have to spend to keep a roof over their heads worries economists.
“It’s stickier and it’s harder to fix than some of the other pressures,” Mayfield said.
Housing is also a big component of the CPI, given that mortgage or rent payments are often a family’s biggest monthly expense. Housing makes up roughly a third of CPI and comprises about 40% of core CPI.
“There’s such a substantial, and almost structural, mismatch between supply and demand,” Mayfield said.
Dawit Kebede, senior economist at the Credit Union National Association, said the long lag time between when housing prices rise and when they are fully reflected in the CPI means that housing could continue to put pressure on both headline and core inflation metrics for a year or more. “It is difficult to estimate how high this peak will be,” he said.
The jump in home prices has largely locked out many young adults and other would-be buyers who don’t have existing home equity to put toward the purchase of a new house.
“There’s a fair amount of folks that are staying renters longer than planned,” said Jeffrey Roach, chief economist for LPL Financial, which drives up demand for homes to rent.
Although robust wage growth has helped mitigate some of the higher expenses American families are facing, experts warned that this also can contribute to inflation lasting even longer.
“I think there’s going to be a little bit more pressure based on the labor market alone,” Mayfield said.
“I think in the near term, the labor scarcity kind of puts a bottom on how far inflation can fall,” Adams said.
“By next year, I expect labor scarcity and wage pressures to be less of a factor for inflation than they are right now,” Adams said.