Inflation eased in July, but Fed chair warns of 'pain' ahead

Inflation’s rise is slowing, slightly.

First, the good news: The preferred inflation index of the Federal Reserve showed price pressure eased up in July.

The Personal Consumption Expenditures (PCE) price index showed an increase of 6.3% year-over-year for July, according to data released by the US Commerce Department on Friday. That was down from the 6.8% increase in June, which was a new 40-year-high. Prices for goods continue to rise, as they were up 9.5% for the month. Food prices, meanwhile, rose 11.9%.

On a month-over-month basis, this gauge showed a 0.1% decline – a welcome note of deflation after months of increases.

The core PCE price index, which excludes more volatile food and energy prices, registered a 4.6% year-over-year increase, down slightly from the 4.8% increase in June. On a month-over-month basis, this index increased 0.1% for the year, down from the 0.6% monthly comparison in June.

While there are signs that inflation is still going in the right direction, the big-picture conditions essentially remain the same: We are in a period of 40-year-high inflation, with the year-over-year PCE price index well above the Fed’s target of 2%.

The Fed is forecasting pain ahead.

Shortly after the new data was released, Fed Chair Jerome Powell drove home the message that there’s a long way to go until the inflation is under control when he spoke at the central bank’s annual retreat in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said.

Powell said this will affect both overall economic activity and the labor market, which has continued to be tight even in the face of rising prices.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Without bringing prices down, Powell said that the economy is unable to have a longer period of good job conditions. He also offered a reminder that, “The burdens of high inflation fall heaviest on those who are least able to bear them.”

While the Fed delivered back-to-back rate hikes of 0.75% in June and July that are still setting in, more increases are likely to be on the way. Powell didn’t say anything definitive about the key bank committee’s next move when it meets again in September. However, he sent a strong signal that the hikes are likely to continue.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said. “The historical record cautions strongly against prematurely loosening policy.”

Offering his own takeaways from that history, Powell added that, “We must keep at it until the job is done.”

Consumer sentiment is starting to improve.

As prices start to fall and gas prices in particular drop, consumers are starting to feel a bit better.

Consumer sentiment ticked up in August, marking a 13% increase over July, according to the final reading of the month University of Michigan Survey of Consumers, In particular, people are getting more optimistic about what’s coming, as the year-ahead outlook rose 59% after two months at its lowest point since the 2008 recession.

“The gains in sentiment were seen across age, education, income, region, and political affiliation, and can be attributed to the recent deceleration in inflation,” wrote Surveys of Consumers Director Joanne Hsu. “Lower-income consumers, who have fewer resources to buffer against inflation, posted particularly large gains on all index components. Their sentiment now even exceeds that of higher-income consumers, when it typically lags higher-income sentiment by over 15 points.”

While Hsu hopes this improvement continues, it’s worth noting that sentiment is still historically low. The August consumer sentiment number rose on a month-over-month comparison, but it was a 17% year-over-year decrease.

While he wasn’t directly addressing this consumer sentiment data, Fed Chair Powell spoke about the role that public attitudes play when it comes to combating inflation. Getting prices under control is not only about data. When people think prices will remain high, they will adjust accordingly in their plans for spending and requests for wage increases. In turn, that is likely to keep driving prices up.

“Inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” he said.

Food inflation is still on the rise, even as gas prices fall.

Some of those expectations are set by forecasts, and the US Department of Agriculture delivered one such outlook this week.

The USDA offered data on the first half of the year and a projection on the second half iin a report on food inflation, which is a particular area of concern as gas prices begin to ease.

Retail food prices rose 8.9% in the first seven month of 2022. Compare that to the same period in 2021, when they rose 1.9%. The 20-year average through 2020, similarly, was 1.7%.

“Prices will continue to change during the remainder of 2022 and may significantly affect the annual inflation rate,” the USDA wrote, pointing to the fact that food price increases were sharper in the second half of 2021.

In all, the USDA projects that food prices will rise between 10 and 11 percent in 2022, which would well outpace the overall inflation rate.

Overall, private sector activity is showing signs of a slowdown.

​As the watch is on for a recession, overall US businessactivity is showing continued signs of slowing.

S&P Global’s Flash Purchasing Managers’ Index (PMI) registered a 27-month low, as S&P senior economist Siân Jones warned of “disconcerting signs” for the economy.

“Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity,” Jones said in a statement. “Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts.”