With a slowdown in July, has inflation finally peaked?

Don Lee
Los Angeles Times

WASHINGTON — After months of steadily climbing to a 40-year high, the pace of inflation slowed notably in July as gas prices fell sharply and Americans got some relief on the cost of clothing, cars and other necessities.

The annual rate of inflation, as measured by the consumer price index, edged down to 8.5% in July from 9.1% in June, according to the Bureau of Labor Statistics report issued Wednesday.

The June inflation figure, the highest since November 1981, is now looking like it may have been the peak of the price surge that began in spring 2021.

If inflation continues a slow but steady decline — as most economists now consider likely — it will be especially welcomed by middle-class and lower-income households that must spend much of what they earn on such staples as apparel and fuel.

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And the slowdown in inflation could not be more welcome to the Biden administration and other Democrats haunted by fears that voter fury over continual surges in the cost of living would translate into disaster at the polls.

Those political fears were all the greater because inflation was not only negating recent wage gains but had ambushed Americans lulled by decades of near-stagnant prices for most goods and services.

That period of price stability was highly unusual in the long sweep of U.S. economic history, but it lasted so long that many Americans came to take it for granted.

Positive developments: The sudden reemergence of inflation largely eclipsed the positive news about the economy over the past year, including the rapid and robust recovery from the pandemic and a burst of wage gains after years of income stagnation for all but the most highly paid workers.

Unhappiness over inflation has been widely seen as one of the primary reasons for Biden’s low approval ratings.

The July inflation report comes on the heels of other recent positive developments that include the retreat in gas prices, resilient job growth and a rebound in stock markets.

Democrats in recent weeks have also scored some legislative victories, including expected passage later this week of a major bill to combat climate change and control drug prices, among other things.

Whether this will make a difference in the midterm election remains to be seen, but people’s perceptions of the economy are often seen through the lens of their partisan leanings, and, according to political scientists, tend to be baked into their voting decisions by summer’s end.

The Fed: No matter how one may view the U.S. economy, there’s no question that inflation is the biggest economic challenge right now for policymakers, business leaders and consumers.

And Wednesday’s report, encouraging as it was, isn’t likely to change the Federal Reserve’s plan to keep hiking interest rates, especially in view of the still-hot labor market.

Moody’s Analytics, a research and forecasting firm, projects the rate of inflation to recede to 6.5% at the end of the year.

That’s a big decline statistically, but inflation is not expected return to near the Fed’s 2% target until well into 2024. And its projections are based on benign outcomes involving the path of the pandemic; the economic fallout from Russia’s invasion of Ukraine; and the Fed’s calibration of monetary policy, said Mark Zandi, Moody’s chief economist.

The Fed has raised its benchmark short-term rate four straight times this year, the last two by a supersized 0.75 percentage point each. Another similarly large rate hike could come in September.

“While the worst of it may be behind us, the central bank has years of hard work in front of it, and the goal of restoring price stability may cause a recession next year,” said Joseph Brusuelas, principal and chief economist at the accounting firm RSM.

One of the Fed’s chief goals in raising rates is to cool the labor market and prevent a wage spiral from taking effect and reigniting inflation pressures.

Jobs and wages: While the unemployment rate last month returned to the pre-pandemic, 50-year low of 3.5%, statistics suggest that average wage growth may also have peaked at around 5%.

There are indications that in tech and interest-sensitive sectors such as finance and housing, more businesses are laying off employees. And workers appear to be more reluctant to hop jobs in search of better pay and benefits.

Those same concerns are expected to push households to pull back on spending, reducing demand that had surged in the past year as consumers, flush with cash from government stimulus checks and booming asset prices, were eager to remake their kitchens or buy entertainment systems or in-home gym equipment.

That had helped gum up supply chains, but some of the major logistics problems have eased recently. Cargo ship backlogs in Southern California, for example, have declined for six straight months, and pressures are ebbing at other modes of transportation as well, said Oxford Economics in a research report.

At the same time, commodity prices fell 8% on average in July, Oxford Economics said, although any easing of inflation at the producer level is far from widespread or even.

Greg Danenhauer, co-owner of Parker Boiler Co., a 70-employee manufacturer in the City of Commerce, said he’s seen little relief in prices and delivery times of key materials and parts, including steel, pumps and valves.

Apart from lumber, he said, “we’re not seeing it yet, but we hope to.”

Consumers: More consumer goods producers and retailers, including Walmart, already have started to cut prices or at least hold down increases so as to move mounting inventories.

For consumers, the most noticeable — and favorable — development on inflation over the last month is what they’re paying at the filling stations.

Nationally, a gallon of regular gas jumped to a record high of $5.02 on June 14 but has since fallen to a little over $4, according to the American Automobile Association. In California it’s dropped to about $5.40 from a peak of $6.44 in mid-June.

That reflects lower crude oil prices as more supply has come online, including Biden’s release of strategic reserves, and as slower global growth has curbed demand. Fears of harsh European energy sanctions against Russia have also eased, which in turn has reduce fears of fuel shortages next winter.

Prices are likely to remain volatile, but for now, most everyone is taking some comfort from the sharp decline at the pumps — perhaps especially Biden.

The president’s public rating for his handling of the economy remains low, but there’s one part of that category that in July got a slight bounce.

According to an ABC New/Ipsos poll last weekend, 34% of Americans said they approved of Biden’s handling of gas prices — up seven points from early June.