U.S. Inflation May Be Turning the Corner
The Consumer Price Index was flat in July compared to June, thanks largely to a drop in energy prices that may or may not persist. The Producer Price Index provides more reasons for optimism.
Finally, a pleasant inflation surprise. The U.S. Consumer Price Index (CPI) was 0.02% lower in July than in June on a seasonally-adjusted basis. It’s the first time the index fell since May 2020—although back then, the declines were considered a cause for alarm, rather than relief. Meanwhile, the Producer Price Index (PPI), which tracks the costs that American businesses pay for inputs as well as the prices they charge for their goods and services, dropped substantially, with “final demand” prices down by 0.5%.
For the first time since August 2021, the categories that had been adversely affected by the pandemic and by the most recent Russian invasion of Ukraine had a beneficial impact on overall CPI inflation. If that persists, the net effect could be a relatively quick return to ~2% yearly inflation, if not a period of mild deflation, regardless of what happens in the rest of the economy. The guts of the PPI numbers provide greater reasons for optimism on this front, with input costs for a wide range of businesses either rising at a much slower rate than before or falling outright.
But even though we should be encouraged by the latest numbers, declaring victory based on the CPI (and even the PPI) would be premature. Special factors may suppress the total inflation rate for a while, but sooner or later that process will stop and we will be left with whatever remains. Honest observers understood that the 11% annualized CPI growth rate in the first half of 2022 was unrepresentative of the underlying inflationary pressures affecting the U.S. economy—and the same holds for the 0% monthly change reported for July.