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U.S. inflation continued to ease from recent highs in July led by a modest decline in gasoline prices. The annual inflation rate hit 3.4 percent in July, down from 3.5 percent in June and its recent peak of 4.2 percent in May. This is largely due to fuel prices, which have fallen over the past two months, though they remain significantly higher than they were a year ago. Outside of fuel, price pressures remained more contained. Annual core inflation (which excludes food and energy) declined modestly to 2.5 percent, tying February for the lowest rate since March ’21.

The softer inflation reading should be welcome news for Federal Reserve policymakers, particularly after last week’s national jobs report included sizeable downward revisions that pointed to a weaker labor market than previously understood. Taken together, cooling inflation and softer employment conditions reduce the likelihood of a rate increase at the Federal Reserve’s September meeting. The more likely outcome is that policymakers hold rates steady as they assess whether inflation continues to moderate.

Outside of the 24.6 percent annual increase in gas prices, other categories showed milder rates of inflation, including housing at 3.3 percent, food and beverages at 2.9 percent, and medical care at 1.7 percent. On a month-over-month basis, overall inflation was flat with the decrease in the price of gasoline being offset by increases elsewhere.

Inflation data for June (including data for metro Houston) will be published by the Bureau of Labor Statistics on Friday, September 11.

Colin Baker
Director of Economic Research
bakerc@houston.org