Inflation surged 8.5% in July, hovering at a four-decade high and adding pressure on the Federal Reserve to bring down the price of necessities such as food, gas and rent.
The July reading of the Labor Department’s Consumer Price Index, a closely watched measure of the costs of goods and services, marked a slight decrease from the previous month, when inflation hit a fresh peak of 9.1%.
That number, the highest since 1981, was driven in large part by a record spike in gas prices that has since receded.
Ahead of the Consumer Price Index release, economists projected inflation would rise 8.7% year-over-year in July and 0.2% compared to the previous month, according to Dow Jones data.
Economists had expected core inflation to hit 6.1% for the month. The Fed’s target for inflation is 2%.
The latest data supports the market’s view that the Federal Reserve will take aggressive action in the months ahead to tame inflation.
The decline in gas prices was the key factor in the slight downtick from June to July. The average price has fallen steadily in recent weeks after hitting an all-time high of $5.016 in mid-June.
As of Wednesday, the national average was $4.010, according to AAA.
While gas prices are on the decline, the costs of other key inflation drivers such as rent and services remain historically steep.
Even with the minor decline in headline inflation, American households likely experienced little relief in July, according to Greg McBride, chief financial analyst at Bankrate.
“To relieve the pressure on household budgets and boost the otherwise sour mood of consumers, we need to see a broad-based, significant, and sustained easing of pricing pressures for the remainder of 2022 and well into 2023,” McBride said.
The latest CPI data emerged just days after a July jobs report that blew away economists’ expectations. US employers added 528,000 jobs in July – more than twice what economists expected – while wages jumped 5.2% year-over-year.
The red-hot jobs market raised concerns among investors that the Fed would implement more sharp interest rate hikes to ensure the economy is sufficiently cooled to bring down prices.
The rate-setting Federal Open Market Committee has hiked its benchmark rate by three-quarters of a percentage point, its sharpest clip since 1994, at each of its last two meetings.
Two top Fed officials – San Francisco Fed President Mary Daly and Federal Reserve Governor Michelle Bowman – said this week to expect more larger-than-normal rate hikes until inflation shows signs of steady decline.
“My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” Bowman said in prepared remarks for the Kansas Bankers Association, according to CNBC.
Ahead of the July CPI release, the market was pricing in a 67.5% probability for a three-quarter percentage point hike at the Fed’s next meeting in September, according to CME Group data.
Fed Chair Jerome Powell has indicated the central bank will closely track data indicators between its July and September meetings before making any decision.
“We anticipate that ongoing increases in the target range for the federal fund rates will be appropriate,” Powell said after the most recent hike in July. “The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy.”
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data that we get between now and then,” he added.
Meanwhile, President Biden and his team took a victory lab ahead of the data, pointing to falling gas prices as a sign that the administration’s policies were having an effect.
Critics have alleged that Biden’s hardline stance toward domestic energy producers has exacerbated the problem.