US inflation will likely stay high even as gas prices fall

Thanks in large part to falling gasoline prices, the government’s inflation report for July, released on Wednesday morning, is expected to show prices rose 8.7% from a year earlier – still a the speed is dizzying but has slowed down compared to 9.1% over the same period last year. in June, the highest level in four decades.

The economists’ forecast, if it turns out to be correct, will raise hopes that inflation may have peaked and that the punitive upward trend in prices is starting to ease slightly. There are other hopeful signs, too, that the pace of inflation may be consolidating.

At the same time, a host of other economic developments are threatening to further increase inflationary pressures. Hiring is going strong and average wages are rising sharply. And even as gas prices fall, inflation in services like health care, rent and restaurant meals is accelerating. Price changes in services tend to be difficult and not as quick and easy as for gas, food or other goods. Those trends suggest that overall inflation may not drop significantly anytime soon.

President Joe Biden pointed out that falling gas prices are a sign that his policies – such as releasing oil from the nation’s strategic reserves – are helping to combat the higher costs that have hit the budget. households, especially for lower income families.

But Republican Party member will drive high inflation is taking place as a top campaign issue this fall, with polls showing high prices have sent Biden’s approval rating plummeting.

On Friday, the House of Representatives was poised to give final Congressional approval to a reinvigorated climate and tax package pushed by Democratic and Biden lawmakers. The bill, among other things aimed at lowering drug prices by allowing the government to negotiate Medicare drug costs, is expected to cut the federal budget deficit by $300 billion over a decade.

However, economists say the measure, which its proponents have dubbed the Inflation Reduction Act, will have only minimal impact on inflation over the next few years, although it could slow it down. slightly more bullish momentum towards the end of the decade.

Economists forecast that Wednesday’s inflation report will show consumer prices rising 0.2% from June to July, according to FactSet. That would mark a sharp decline from the 1.3% gain from May to June.

But excluding volatile food and energy categories, so-called core inflation is likely to remain high. Economists predict that core prices rose 0.5% in July, still a strong gain, although down from a 0.7% gain in June. Such an increase would put core prices 6.1 percent higher from a year ago, up from a 5.9% year-on-year increase in June.

If overall inflation falls in July, it will largely reflect a 16% drop in pump prices from their peak in mid-June, when gas prices hit the national average of $5 a gallon. The average price dropped to around $4.20 at the end of July and was just $4.03 on Tuesday. Continued declines mean lower gasoline prices are likely to drag inflation lower in August.

Other items could also help cushion July’s rise: Food costs, although likely to continue to rise, have probably increased at a slower rate than in June. Prices for used cars, clothing and rental cars could also drop.

Federal Reserve Chairman Jerome Powell said the Fed needs to see a series of monthly key inflation indicators fall before considering a pause in rate hikes. While the Fed tracks more closely than another measure of inflation, it also tracks metrics in Wednesday’s report, known as the consumer price index.

The Fed has raised its benchmark short-term rate at four past rate-setting meetings, including a three-quarter point hike in both June and July – the first such large increase since 1994. The incredible jobs for July release that the government released on Friday – with 528,000 jobs added, wages rising and the unemployment rate corresponding to a half-century low of 3.5% – consolidate Expect that the Fed will announce another three-quarter increase when it meets in September.

Financial markets are betting that the Fed will raise rates several more times this year, between 3.5% and 3.75%, but will eventually have to cut rates next summer because of the Traders expect higher interest rates to trigger a recession.

Some trends reduce future inflation. Struggling supply chains have caused the high prices of cars, furniture, home appliances and other goods to ease.

According to Oxford Economics, the number of ships waiting to unload at the Port of Los Angeles/Long Beach has declined for the sixth straight month. Oxford says transport costs have generally leveled off or fallen, including for road and rail services, although they remain high.

And a drop in Americans’ expectations for future inflation could also keep higher prices from entrenched. Such expectations can be self-fulfilling: If people believe inflationary will stay high or deteriorate, they are likely to take steps – such as demanding higher pay – that can then push prices higher in a self-sustaining cycle. Companies often raise prices to offset their higher labor costs.

But a survey by the Federal Reserve Bank of New York, released on Monday, showed that Americans now expect lower inflation over the next few years than they did a month ago. Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said lower inflation expectations could allow the Fed to react less aggressively to reports, such as a hiring boom in May. earlier, indicating that the economy is still strong and inflation may continue to be high. .

“It’s a modest sign,” Ma said of inflation expectations data.

This story has been published from the electronic agency’s feed with no modifications to the text.

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