The Labor Department released its consumer price index on Wednesday, revealing that consumer prices climbed by a modest 2.9% over the year leading up to July. This annual rate indicates that the significant inflation spike seen in 2022 is continuing to subside.

It marked the first time the annual inflation rate dipped below 3% since March 2021. This summer has seen a gradual decrease in inflation rates after a brief uptick in the spring months.

Month over month, prices increased by 0.2%. Food prices rose 2.2% over the year, while energy prices saw a 1.1% increase, though gasoline prices actually declined. Notably, transportation services surged by 8.8%, and shelter costs rose by 5.1%.

According to the Labor Department, the increase in shelter prices accounted for “nearly 90 percent of the monthly increase” in overall inflation. The rise in transportation and housing costs has contributed to the increase in “core” inflation, a significant measure that omits the more unstable food and energy sectors, which increased by 3.2% annually.

The Federal Reserve aims for an inflation target of 2%, using a specialized index based on personal consumption expenditures, which has not yet been achieved. However, the recent numbers suggest a positive trend.

“The July Consumer Price Index looks to reflect the further progress the Federal Reserve desires towards its 2% inflation target,” stated Mark Hamrick, a senior economic analyst at Bankrate.

Rising costs for rent and accommodation are still a significant challenge for the Federal Reserve in its efforts to combat inflation, noted Ryan Sweet, Chief US Economist at Oxford Economics.

When Can We Expect Interest Rate Cuts from the Fed?

The decrease in inflation has led to indications from the Federal Reserve that they may consider lowering interest rates as early as mid-September, an anticipated development within the investment sector.

Since July 2023, the Federal Reserve’s benchmark interest rate has remained above 5%, at its highest level in 23 years, while the committee awaits further signs of easing inflation.

Consequently, consumers have faced the dual challenge of high inflation and elevated interest rates, resulting in decreased affordability for homes, vehicles, and other goods.

Increasing pressure has been placed on the Federal Reserve to reduce rates, with some critics holding the committee responsible for the recent fluctuation in the stock market. Most analysts are expecting the first rate cut to occur in September.

“We anticipate the Federal Reserve will cut interest rates by up to half a percentage point during their meeting on September 17-18,” wrote Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, in a note prior to the inflation update.

“This September rate reduction, alongside another quarter-point cut anticipated in both November and December meetings, should aid the economy in shifting from slower growth to a modest acceleration projected to last through 2025,” he added.

Inflation is Retreating from Its 40-Year Peak

Another round of interest rate cuts would signify that the Federal Reserve is largely content with the current inflationary conditions.

Inflation peaked at 9.1% last summer, marking a 40-year high. It has been gradually declining since, hovering between 3% and 4% in the past few months.

In June, the annual inflation rate recorded at 3%, marking the third month in a row of declining inflation and the smallest increase seen within a year.

Many analysts had forecasted that the inflation rate would stabilize around 3% in July. Retailers have started slashing prices, and the costs of gasoline have dropped compared to both the previous month and last year. Additionally, prices for new cars have become more stable.

Moreover, wages have been rising at a pace that outstrips inflation, giving households enhanced purchasing power.

Consumers Still Feel the Effects of Rising Prices

Despite the easing inflation, it has yet to resonate fully with consumers. Economists indicate that Americans are still acutely aware of the overall rise in prices over time, especially for necessities like food and fuel.

Take this into account: a group of consumer products that was priced at $100 at the beginning of 2020 is projected to cost $121.79 by June 2024, as indicated by a governmental inflation calculator.

Consumers are reacting to the increased costs by opting for less expensive store brands, shifting from full-service restaurants to quick-service places, and even hesitating at the increasing prices of fast food. In response, fast-food restaurants have brought back value meal options.