Inflation Cools to Lowest Level Since March 2021

Little more than a week after fears of a broader economic downturn caused turmoil on the stock market, the latest inflation data, released on Wednesday, helped calm the nerves of investors unsettled by the latest turbulence. According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 2.9 percent over the last 12 months before seasonal adjustment - down from 3.0 percent in June and the lowest reading since March 2021. Meanwhile core inflation, which excludes volatile food and energy prices, came in at 3.2 percent in July, which is the lowest level recorded since April 2021.

Due to its weight in the Consumer Price Index, the cost of shelter continues to be the main driver of inflation these days. Rents and owners' equivalent rents of residences increased 5.1 and 5.3 percent year-over-year in July, respectively, as the index for shelter climbed for the 51st consecutive month. In fact, excluding the impact of shelter, inflation would have fluctuated around the Fed's target level of 2 percent for the past year already, illustrating that housing costs have been the most stubborn driver of elevated inflation lately.

Back in the spring of 2021, when inflation took off, the high readings could largely be explained by the so-called base effect, as prices had fallen sharply at the onset of the pandemic a year earlier, when demand for many goods and services had suddenly dried up. Due to that initial dip in consumer prices, year-over-year comparisons were exaggerated for a while, but towards the end of 2021 inflation became a real concern, which turned into a global crisis when Russia attacked Ukraine, resulting in surging food and energy prices. Now that the conflict in Ukraine has dragged on for more than two years, price levels are measured against already elevated prices, partially explaining the steep drop in inflation in the first half of 2023 and why progress has been notably slower since then.