Inflation Cools a Tad, But Don’t Get Too Excited

Consumers continued to pay more for new cars, gas, and food in July

Young woman paying cashier in clothing shop
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The pace of price increases cooled a bit between June and July, though the inflation rate remained high, and consumers continued to pay more for new cars, gas, groceries, and dining out.

Key Takeaways

  • The pace of consumer price increases decelerated a bit in June, but was still high, government data showed Wednesday.
  • Consumers continued to pay more for new cars, gas, and food.
  • While the 2020 economic crash caused the sharp rise in inflation experienced this year, there’s disagreement about how long higher prices will persist.

The Consumer Price Index (CPI) rose 0.5% in July, decelerating from 0.9% in June and marking the smallest month-to-month increase since February, according to data released Wednesday by the Bureau of Labor Statistics. Prices for used cars and trucks, which had driven a substantial share of the overall jump in recent months, eased in July, increasing just 0.2% after a 10.5% jump in June.

Compared to July 2020, prices were 5.4% higher, the same year-over-year inflation rate seen in June—the highest since 2008. The core inflation rate—which excludes prices for food and energy because they tend to be more volatile—slowed to 4.2% from 4.5% in June, which had been a nearly 30-year high.

Rising prices reflect the economy’s growing pains as it restarts following the pandemic crush. Consumers have wanted to buy goods and services at the same time that businesses have struggled to adjust to a shortage of materials and workers

To compensate, businesses have started to pass rising costs on to their customers in the form of price hikes. In the last three months, 46% of small businesses have raised their prices, according to a survey released Tuesday by the National Federation of Independent Business, with 44% saying they plan increases in the next three months.

Last year’s economic downturn made the baseline for year-over-year comparisons unusually low, but those so-called base effects have begun to fade, meaning inflation has likely reached a peak, wrote Kathy Bostjancic, chief U.S. financial economist for Oxford Economics, in a commentary Wednesday.

"It's early, but there are tentative signs that some of the temporary factors behind the past surge in U.S. inflation are fading," wrote Ryan Sweet, an economist and senior director at Moody’s Analytics, in another commentary.

Federal Reserve Chairman Jerome Powell has said higher inflation should be temporary as factors like supply bottlenecks fade. Others, including Harvard University economist Jason Furman, aren’t so sure, saying that the widespread price increases we've seen aren’t consistent with so-called transitory inflation, and in fact have pushed up prices faster than the pre-pandemic trend.

The price of new vehicles rose 1.7% in July, slightly less than the 2.0% in June, but still a reflection of huge consumer demand coinciding with a shortage of parts limiting how many vehicles automakers can produce, economists said. Consumers paid more for travel-related items like hotels (a jump of 6.8% after a 7.9% increase in June) and gasoline (2.4% after a jump of 2.2% in June), as well as for dining out (0.8% after June’s increase of 0.7%) and groceries (0.7% following a jump of 0.8% in June). 

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