July brought a welcome improvement in inflation. One month doesn’t make a trend, but if the improvement continues, consumers could eventually have something more meaningful to celebrate.
There was some good news in the latest inflation report.
Consumer prices rose just 0.1% in July, while core inflation—which excludes the more volatile food and energy categories—rose 0.2%.
That’s encouraging.
After months of elevated prices and economic uncertainty, even a modest improvement deserves recognition. But as we often say at Good Eye Mike, one month doesn’t make a trend.
One good month is welcome. Two or three in a row could signal something more important: a trend.
Cooler Inflation Doesn’t Mean Lower Prices
This distinction is especially important for consumers.
When inflation declines, it generally doesn’t mean the prices we see at the grocery store, restaurants or other businesses are going back to where they were a year or two ago.
It means those prices are increasing more slowly.
If a restaurant meal has gone from $15 to $18, a cooler inflation report doesn’t suddenly make it $15 again. The same applies to groceries, insurance, utilities and countless other household expenses.
Some businesses may also still be working earlier cost increases into their prices.
So consumers shouldn’t expect today’s report to produce an immediate difference in their wallets.
But if inflation continues cooling month after month, the effect becomes much more meaningful.
What Could Happen If This Becomes a Trend?
Several months of lower inflation could gradually improve the economic picture for households.
Businesses would face less pressure to continually raise prices. Consumers could gain confidence that prices are becoming more stable.
And perhaps most importantly, sustained improvement in inflation could give the Federal Reserve more flexibility with interest rates.
That’s especially relevant after last week’s employment report showed a much weaker labor market than previously thought.
The Fed now has two important developments to consider:
Inflation showed improvement, while employment showed signs of weakening.
If both trends continue, policymakers may eventually decide that today’s higher interest rates are placing more restraint on the economy than necessary.
That could open the door to lower rates.
Why Lower Interest Rates Would Matter
Federal Reserve policy can sound pretty distant from everyday life.
It isn’t.
Lower interest rates can eventually reduce borrowing costs for automobiles, homes and businesses. Credit-card rates can also respond, although usually not immediately or by exactly the same amount.
Businesses facing lower financing costs may become more willing to purchase equipment, expand operations and hire additional employees.
That last one could become particularly important if the recent weakness in employment continues.
Consumers Are Already Making Choices
Higher prices and higher borrowing costs have changed the way many people approach spending.
People don’t necessarily stop spending altogether. Instead, they may hesitate.
Maybe the old refrigerator lasts another year.
Maybe a home improvement gets postponed.
Maybe instead of eating at a restaurant four times this month, you go twice.
Or perhaps you’re driving home thinking about stopping for a beer and something from the food truck—and then decide you’ll save the money and head home instead.
Those small decisions don’t show up individually in an economic report.
But when millions of households become a little more selective about spending, demand can soften. And weaker demand can eventually make it more difficult for businesses to continue raising prices.
Ironically, some of the caution consumers are feeling today could eventually contribute to lower inflation tomorrow.
Energy Could Be Another Piece
There is still a major unknown: energy.
Geopolitical tensions have contributed to volatile oil and gasoline prices. If those pressures ease and energy prices decline, that could provide additional help to headline inflation.
Lower energy costs can also benefit businesses because transportation, shipping and production costs affect prices throughout the economy.
But geopolitical events are unpredictable, which is another reason not to make too much of a single month’s inflation report.
The Bottom Line
July’s inflation report was good news.
Let’s call it that.
But consumers aren’t suddenly going to find lower prices everywhere they shop, and one favorable month doesn’t tell us where inflation will be several months from now.
The next few reports will tell us much more.
If inflation continues cooling while the labor market remains weak, the Federal Reserve could eventually have considerably more room to lower interest rates.
That could mean lower borrowing costs, greater business investment and eventually a little more breathing room for consumers.
For now, we’ll take the small victory.
Inflation moved in the right direction. Now let’s see if it keeps going.
Resources
U.S. Bureau of Labor Statistics — Consumer Price Index
Read the latest Consumer Price Index report
U.S. Bureau of Labor Statistics — Employment Situation
Read the latest monthly employment report
Willie and I appreciate every visitor to Good Eye Mike. Thank you for reading and following along as we look beyond the headlines to understand what the economy means for everyday life.
Mike & Willie 🐾