As energy prices decreased in July 2022, the rate of increase in prices moderated, bringing the annual inflation in the US down from a four-decade high. According to the Labor Department, the Consumer Price Index (CPI), which tracks how much people pay for goods and services, increased 8.5% in July 2022 over that in the corresponding month in 2021, down from a 9.1% increase in June 2022. June 2022 recorded the fastest pace of inflation since November 1981.
Will the Fed Remove the Foot off the Pedal?
As the US recovered from the COVID-19 pandemic, rapid growth, fueled in part by reduced interest rates and government support, is the result of elevated inflation. The challenge for the Federal Reserve is to tighten monetary policy to calm the troubled labor market and slow the demand sufficient enough to stop inflation without triggering a recession. The Fed welcomed the decrease in core inflation as measured by the one-month rate, but inflationary pressure is still spreading and could prevent the Fed’s desired sustained decline in core inflation.
The Dollar Continues to Get Stronger
Since the beginning of 2022, the dollar drifted lower in light summer trading, but soon changed direction as the stock markets in the US fell due to profit warnings, worries about global inflation, and information that showed a significant decline in worker productivity in the second quarter of 2022. The euro increased 0.2% to $1.0204 on August 10, 2022, while sterling decreased 0.12% to $1.2065. The dollar decreased 0.14% to 135.195 yen. The reputation of the dollar as a safe haven, however, makes it more difficult to predict how the dollar will respond, particularly due to the escalating geopolitical and growth concerns.
What to Expect Now
Due to the declining prices of energy, such as those of gasoline, the CPI was mostly unchanged on a monthly basis in July 2022 after climbing for 25 consecutive months. However, yearly inflation is still high at almost 8%, and food prices are rising as well, giving President Joe Biden and the Democrats little respite before the mid-term elections. Although total price hikes fell marginally from the four-decade peak as was evident in June 2022, falling prices of gas in July 2022 afforded Americans a small respite from the misery of high inflation. While there are some indications that inflation could slow down in the next few months, it is expected to be high going into the following year.
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