U.S. Core CPI Posts Smallest Back-to-Back Increases in Two Years

A key measure of U.S. consumer prices rose only modestly for a second straight month, bolstering hopes that the Federal Reserve can tame inflation without sparking a recession.

The core consumer price index (CPI), which excludes often-volatile food and energy costs, rose 0.2 percent for a second month, Bureau of Labor Statistics (BLS) data showed Thursday. That marked the smallest back-to-back gains in more than two years.

Economists view the core measure as a better indicator of underlying inflation than the overall CPI, which also increased 0.2 percent. The annual CPI measure, however, picked up slightly due to a less-favorable comparison with the index a year ago.

The progress on inflation, combined with solid economic growth and a healthy but gradually cooling labor market, represents another step in the right direction for the central bank. The highest interest rates in 22 years have played a role in calming price pressures but have yet to tip the nation into a recession that many economists once thought was inevitable.

While the latest CPI report likely boosts the chances that the Fed will leave rates unchanged at their meeting next month, inflation remains above their target. Officials will also have a number of other key data points to consider before then.

The details showed more than 90 percent of the increase in the overall CPI was due to housing costs that have otherwise moderated since the start of the year. Used-car prices, meanwhile, fell for a second month, while airfares posted the biggest back-to-back declines since the start of the pandemic.

Nonetheless, American households faced increased costs for necessities last month. Groceries rose by the most since early this year, utilities are higher, and gasoline prices are rising. Auto insurance is up the most since 1976 on an annual basis.

A separate report Thursday showed that applications for unemployment benefits rose by the most in two months. Continuing claims, a proxy for the number of Americans receiving benefits, remained relatively subdued.

Excluding housing and energy, services prices rose 0.2 percent from a month earlier, a pickup from June, according to Bloomberg calculations. As a result, the year-over-year metric edged up to 4.1 percent, the first acceleration this year.

Although Fed Chair Jerome Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index. The July personal consumption expenditures price index, which is also the basis of the Fed’s 2 percent target, will be released later this month.

The acceleration in services prices last month was partially offset by deflation in merchandise, led by a decline in used car prices. So-called core goods prices, which exclude food and energy commodities, fell by the most since March of last year.

Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, rose 0.4 percent for a second month. A moderation in housing costs is an essential feature for a sustained downward trend in core inflation.

What Bloomberg Economists Say…

“July’s CPI print is the second straight to show core inflation rises at a pace consistent with the Fed’s 2% mandate. … We expect the Fed to keep rates on hold for the rest of the year.”

— Anna Wong & Stuart Paul

The sustained strength in the economy and moderating inflation have prompted several economists—including those at the Fed—to drop their recession forecasts altogether. Consumers, meanwhile, are finally benefiting from rising real wages.

After falling for two years, inflation-adjusted wages grew 0.3 percent in July and were up 1.1 percent from a year earlier, a separate report showed Thursday.

The outlook, however, remains murky—both for the economy and inflation. The resumption of student loan payments and tightening lending conditions remain key headwinds.

On the inflation front, the path could get a bit bumpier. For example, the CPI won’t reflect the full extent of the latest surge in gasoline prices until the next report. Meanwhile, health insurance, which has acted as a welcome drag on the CPI for the past year because of the way the BLS calculates the figure, will soon begin adding to consumer price growth.

—With assistance from Augusta Saraiva & Chris Middleton.

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