Annual price increases for many purchases have already slowed below the Fed’s overall 2% target, and some are outright declining as companies slash prices and dangle discounts to lure increasingly frugal shoppers.
Prices for food-at-home —essentially, groceries — posted a negligible 0.1% growth rate over June, and are up just 1.1% over the past 12 months. Meat, poultry and fish were up 1.9% since July 2023, while milk prices were 1.2% higher over that period. Categories that are getting cheaper include used cars (-10.9%), airfares (-2.8%) and gasoline (-2.2%).
On Monday, the New York Federal Reserve reported that consumers' three-year inflation outlook hit a record low, and a measure of wholesale price increases came in lower than expected Tuesday. Indeed, most of the 22% gain in pandemic-era inflation occurred from 2020 to 2022; last year, the index increased by roughly 3.5%.
Many consumer brands now say they're seeing shoppers gravitating toward bargains.
“We’re seeing lower average selling prices ... right now because customers continue to trade down on price when they can,” Amazon CEO Andrew Jassy said on the company's earnings call this month. Analysts said a spate of discounts helped juice demand during the e-commerce giant's Prime Day sales event last month.
Meanwhile, McDonald's plans to extend a recent $5 meal deal that people have embraced after the fast-food chain saw its menu price hikes dent foot traffic. Even airlines and hotels are slashing rates during the busy summer season, giving last-minute vacationers some of the best bargains in years.
With Fed officials meeting Sept. 17-18 to set interest rates, investors are virtually certain a cut is coming but disagree over how deep it might be. Last week, after a weak jobs report fueled concerns that the economy was slowing too sharply, markets were betting on a hefty half-percentage-point reduction, rather than a quarter-point. That likelihood, seen at 69% a week ago, dropped to less than 44% Wednesday morning after the CPI data.
"July’s CPI report is probably best described as mildly encouraging — it adds support for a 25 (basis point) rate cut in September but, at the same time, doesn’t suggest price pressures are collapsing in a way that could warrant a bigger 50bp reduction," Paul Ashworth, chief North America economist at Capital Economics, wrote in a note to clients following Wednesday's data release.
Many economists say the Fed's interest rate hikes starting in spring 2022 has succeeded in slowing inflation. By making it costlier to borrow, the central bank has curbed demand for goods and services, making it harder for businesses to keep raising prices.
It's likely that a cooling labor market has been weighing on consumers more recently, though. The unemployment rate climbed to 4.3% in July — still historically low but a level not seen since the summer of 2017.
"Amid increasingly worrisome conditions in the labor market, we expect the Fed to consider inflation is close enough to its target andembark on a rate cutting cycleat its next meeting," Wells Fargo economists wrote in a research note this month.
And many other parts of the economy, including housing costs, child care and insurance, continue to soar. While only housing costs account for a significant weight for the overall CPI —and, indeed, are largely responsible for keeping it above 2% — many households continue to struggle.
A recent Gallup poll found 46% of respondents describing current U.S. economic conditions as “poor” — the prevailing response for the 29th straight month. And the New York Fed survey has found the share of respondents describing their financial situation as "somewhat better off" has declined for eight consecutive months.
A host of factors, including ongoing shortages in key roles, shifts in consumer behavior and even climate change, have contributed to elevated price growth in affected categories. Even so, there are already signs of easing thanks to resetting annual increases for insurance premiums, lower commodities prices and slowing job growth.
The central bank is now focusing more on that last factor.
"Federal Reserve officials have reason to be increasingly concerned about softening of the job market, the other part of its dual mandate of stable prices and maximum employment," Bankrate Senior Economic Analyst Mark Hamrick said in a statement ahead of Wednesday's CPI data.
