July inflation data suggests things might be cooling off

The Fed is breathing a big sigh of relief about yesterday’s inflation report. Consumer prices rose 0.1% in July, bringing the annual inflation rate down to 3.4% from 3.5% in June. The core inflation rate (which excludes volatile items like energy and food) reflected its lowest level since 2021. These small drops hint that inflation might finally be slowing.

This represents a second consecutive month of tame inflation data, following intense ups and downs, primarily triggered by the war in Iran, which has spiked energy prices. Peace efforts calmed oil prices in July. But don’t celebrate yet—faltering peace talks have sent oil prices back up, and gas prices are still about a dollar higher than they were a year ago, according to AAA.

What else went down last month?

• Grocery prices sank for the first time since March. Analysts mostly chalk that up to the diarrhea-causing parasite driving down lettuce prices, but ground beef prices also fell 1.6%, the most since 2020.
• Hotel and motel prices fell 3.3%. However, rents jumped 0.3%.

So, what about Warsh? We’re still far from the Fed’s 2% inflation goal, so an interest rate hike remains possible in September. But with last Friday’s lackluster jobs report, the Fed could choose to take its favorite course of action: not changing rates—especially if this month’s inflation numbers are also tame.—MM