Inflation Slowed Down in July, but Consumers Aren't Out of the Woods

The numbers are still really high.

For months on end, consumers have been struggling to make ends meet in the face of roaring inflation. Last year, inflation levels started to creep upward during the spring and summer, but back then, Americans had stimulus checks and monthly Child Tax Credit payments to fall back on. This year, there's been no federal stimulus aid, and so many people have had no choice but to raid their savings or take on credit card debt to cover their essential costs.

Meanwhile, inflation data was just released for the month of July, and it was better than expected. But that doesn't mean consumers will see their living costs drop overnight.

Rampant inflation is still here

In July, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, rose 8.5% on an annual basis in July. Now on the one hand, that's lower than June's CPI reading of 9.1%. It's also lower than the 8.7% reading economists were expecting.

But a CPI reading of 8.5% is still extraordinarily high. And it means consumers may still struggle to pay for basic expenses.

Some costs are coming down

A big reason July's CPI reading was lower than June's is that gas prices finally eased last month. Compared to June, the cost of gas dropped 7.7%. That helped offset a 1.1% increase in food costs from the previous month.

Energy prices also fell 4.6% from the previous month. And used vehicle prices, which have soared due to supply chain issues, were down 0.4%.

When will consumers get relief?

The fact that July's CPI reading was lower than June's is a good thing. But it doesn't mean consumers can breathe a sigh of relief just yet.

We could, unfortunately, still be in for many more months of soaring inflation. And so consumers will need to be very careful with their spending until we see a more notable CPI drop.

Meanwhile, July's CPI reading might inspire the Federal Reserve to go easier on interest rate hikes at its next meeting. The Fed recently increased interest rates by 0.75% for two months in a row in an effort to slow the pace of inflation. That, in turn, is driving borrowing costs up for consumers.

Now to be clear, the Fed wants borrowing to be more expensive. That's a good way to push consumers to curb their spending, thereby narrowing the gap between supply and demand that caused inflation to soar in the first place.

If the Fed is pleased with the progress we've made with regard to inflation, it may opt for a more modest rate hike during its next go-round. And that could help ease recession fears to some degree.

On the other hand, the Fed may decide that not enough progress was made in July, and that it wants to move forward with more substantial rate increases until CPI readings are considerably lower. If it goes that route, consumers who have racked up credit card debt to stay afloat may find that it starts to cost them even more.