Economists were pleased with the latest inflation report, which showed the Consumer Price Index for July was described as “tame” and “benign.” This marked a return to normalcy and healthiness in the inflation reading, which had previously been distorted by the pandemic. The fact that inflation fell below 3% for the first time since 2021 was a reason to celebrate, especially considering the rapid decline from over 9% in just two years. This type of cooldown has only occurred once in the past six decades.
Despite the positive news on inflation, certain essential expenses like housing continue to rise. Shelter costs make up a significant portion of the CPI basket, with a 5% increase year-over-year in July accounting for 90% of the monthly increase in the index. However, there is hope that housing costs will eventually decrease as mortgage rates have recently dropped to their lowest levels in over a year. With the Fed expected to bring down interest rates and housing inventory levels rising, the hurdle of housing costs in inflation may soon be overcome.
In addition to housing, other expenses such as car insurance and child care are also rising. Between 2021 and 2024, auto insurance costs have increased by 50% despite the decrease in car prices. Childcare costs have also risen in line with overall inflation, with the typical cost of infant daycare in major metro areas reaching around $1,400 a month in 2022. Even small percentage increases in these fixed and unavoidable expenses can have a significant impact on monthly budgets, making it harder to celebrate the decline in overall inflation.
While high prices for essentials may dampen the celebration of decreasing inflation, it’s important to consider the overall economic context. Wages are outpacing inflation and the labor market remains robust, which helps mitigate the impact of high prices on consumers. In comparison, high prices combined with high unemployment would create even greater economic challenges. This perspective highlights the importance of a strong job market and rising wages in navigating the current inflationary environment.
Overall, the recent inflation report was seen as a positive development by economists, signaling a return to normalcy in consumer price readings. While certain expenses like housing, car insurance, and childcare continue to rise, there is optimism that these costs may eventually decrease. The combination of decreasing inflation and a strong labor market provides a buffer against the challenges posed by high prices for essential goods and services. Despite lingering economic hurdles, the current situation is more manageable compared to scenarios with both high prices and high unemployment.
