Annual US inflation falls to 3-year low, clearing the way for the Fed to begin cutting rates

WASHINGTON — Year-over-year inflation reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the Federal Reserve for an interest-rate cut in September.

Wednesday's report from the Labor Department showed that consumer prices rose just 0.2% from June to July after dropping slightly the previous month for the first time in four years. Measured from a year earlier, prices rose 2.9%, down from 3% in June. It was the mildest year-over-year inflation figure since March 2021.

In the metropolitan area, including Long Island, consumer prices climbed 4.1% in July compared with a year earlier. That year-over-year increase was slightly smaller than June's 4.2%, but still the highest since March 2023.

The ongoing inflation slowdown could affect the presidential campaign, given that former President Donald Trump, a Republican, has highlighted rampant inflation as a key failing of the Biden administration and its energy policies. Vice President Kamala Harris, a Democrat, has said she would soon unveil new proposals to "bring down costs and also strengthen the economy overall."

The Department of Labor said nearly all of July's inflation reflected higher rental prices and other housing costs, a trend that, according to real-time data, is easing. As a result, housing costs should rise more slowly in the coming months, contributing to lower inflation.

In July, grocery prices rose just 0.1% and are a scant 1.1% higher than they were a year earlier, a much slower pace of growth than in previous years. Yet many Americans are still struggling with food prices, which remain 21% above where they were three years ago, though average wages have also sharply increased since then.

Gas prices were unchanged from June to July and have actually fallen 2.2% in the past year.

Wednesday's report showed that inflation is steadily falling closer to the Fed's 2% target — though not too quickly, which might suggest that the economy is weakening, said Tara Sinclair, an economist at George Washington University and a former Treasury Department official.

"It’s a comforting report, both because it is going in the right direction and because it is not doing anything too dramatic," Sinclair said.

In the New York area, the cost of housing is largely responsible for rises in the consumer price index, said William J. Sibley, regional commissioner for the federal Bureau of Labor Statistics, which produces the monthly index.

Residential rents climbed 5% in July compared with a year earlier in the 25-county region that includes Long Island. Prices for electricity and natural gas were up 15.1% and 9.4%, respectively, year over year.

Economist John A. Rizzo, a professor at Stony Brook University, said, "Fuel and housing inflation remain high on Long Island despite the overall modest rise in inflation."

The cost of groceries rose 0.7%, year over year, with dairy products up 1.8% and meat, poultry, fish and eggs up 0.5%. The cost of recreation climbed 6.4%.

These increases were partially offset by declines in the cost of gasoline, which fell 1.4% last month compared with July 2023, and apparel, which fell 4.2%. The cost of medical care was down 2.4%.

The local and national price indexes "provide the Fed with further justification to cut interest rates at their next meeting" in September, Rizzo told Newsday. "One may anticipate a rate cut of one quarter point rather than a half point." 

For nearly a year, cooling inflation has provided gradual relief to America’s consumers, who were stung by the price surges that erupted three years ago, particularly for food, gas, rent and other necessities. Nationwide, inflation peaked two years ago at 9.1%, the highest level in four decades.

Fed Chair Jerome Powell has said he is seeking additional evidence of slowing inflation before the Fed begins cutting its key interest rate.

When the central bank lowers its benchmark rate, over time it tends to reduce the cost of borrowing for consumers and businesses. Mortgage rates have already declined in anticipation of the Fed’s first rate reduction.

Another inflation report will be issued next month before the Fed's Sept. 17-18 meeting, with economists expecting that report to also show that price increases remained mostly tame.

— With James T. Madore