Inflation Picks Up, but Details Under the Surface Are Encouraging

Fresh inflation data offered the latest evidence that price increases were meaningfully cooling, good news for consumers and policymakers alike more than a year into the Federal Reserve’s campaign to slow the economy and wrestle cost increases back under control.

The Consumer Price Index climbed 3.2 percent in July from a year ago, according to a report released on Thursday. That was the first acceleration in 13 months, and followed a 3 percent reading in June.

But that tick up requires context. Inflation was rapid in June of last year and slightly slower the following month. That means that when this year’s numbers were measured against 2022 readings, June looked lower and July appeared higher than if the year-ago figures had been more stable.

Economists were more keenly focused on another figure: the “core” inflation index, which strips out volatile food and fuel prices. That picked up by 4.7 percent from last July, down from 4.8 percent in June. And on a monthly basis, core inflation roughly matched an encouragingly low pace from the previous month.

The upshot was that inflation continued to show signs of seriously receding after two years of rapid price increases that have bedeviled policymakers and burdened shoppers — and the details of the July report offered positive hints for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and which should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly.

“This is continuing the kind of progress I think that you want to see,” said Omair Sharif, the founder of Inflation Insights, a research firm.

Airfares fell sharply, and hotel costs eased last month. Big drops in those categories may be difficult to sustain but are helping to limit price increases for now.

Used cars were also cheaper last month, a trend that some economists expect to intensify in the months ahead, based on declines that have already materialized in the wholesale market where dealers purchase cars.

The latest figures are likely to matter at the Fed, where officials are debating whether and when to raise rates again this year to ensure that the economy slows enough to guarantee that inflation fully returns to normal.

Policymakers have raised the benchmark rate to a range of 5.25 to 5.5 percent, up from near zero in March last year. Higher rates make it more expensive to borrow to buy a house or afford a car, with the goal of slowing growth and chipping away at how much companies can raise prices.

Economists thought that the price data might make policymakers more comfortable holding off on a rate move at their next meeting, on Sept. 20.

“There are a lot of seeds in this report that suggest more disinflation to come,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, a research firm. “It probably means that we are at — or very close to — the peak on interest rates.”

Still, Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said in an interview with Yahoo Finance on Thursday that the fresh inflation data was “not a data point that says victory is ours,” and kept the option of another rate increase on the table.

Even if it included positive news for the Fed, the July inflation report was harder for the Biden administration to brag about, given the pickup in the headline number. President Biden noted that the overall inflation rate had fallen since last summer, and highlighted the decline in core inflation in July. “Today’s report shows that our economy remains strong,” he said in a statement.

The Republican National Committee pointed out the uptick in overall inflation in July, and said in a statement that the rate “remains more than double what it was when Biden took office.”

There is a risk that the overall inflation gauge could stay higher into August. Gas prices began to pick up at the end of July. Although the jump came too late to matter much for that month’s report, it has persisted into August and could prop up inflation in the next set of figures.

But Paul Ashworth, the chief North America economist at Capital Economics, wrote that “other than triggering a rebound in airline fares via higher jet fuel prices, we expect the knock-on impact” of higher fuel costs “to be pretty modest.”

Still, a big question about the future evolution of inflation lingers: Can it slow sustainably without a more marked pullback in the broader economy? So far, consumers continue to spend, wages continue to rise, and the job market remains strong despite the Fed’s rate moves, all of which might keep demand strong and prices increasing.

Even amid the resilience, though, the trend toward relentlessly higher prices does seem to be cracking.

Part of that owes to a return to normal after the pandemic. Messed-up supply chains are healing, allowing prices for some goods to come down. Workers are filling open jobs in service and production. Travel, which had plummeted before surging back, is reaching a more stable growth pace.

And some companies are beginning to find that they cannot keep charging customers more without losing them. Noodles & Co., the fast-casual restaurant chain, raised prices by 8 percent in the second quarter of 2022 and another 5 percent in early 2023. But as it did that, it saw price-sensitive guests pull back and revenues fall.

The chain has been emphasizing cheaper bowls and a macaroni and cheese meal deal to help lure diners back. It has not repeated a big price increase in mid-2023, Mike Hynes, the firm’s chief financial officer, told analysts this week on an earnings call.

“We have gained some good traction, winning guests back from a value perspective,” he said. “But it’s going to take some time.”

Jim Tankersley contributed reporting.