The Consumer Price Index climbed 3.2% in the year through July, the first acceleration in 13 months. But that figure requires a closer examination. Inflation soared in June 2022 and was slightly slower the following month. When this year’s figures were measured against last year’s readings, June looked lower and July appeared higher.

After recording a 3.0% annual increase in June, the CPI rose just 3.2% year over year in July, before seasonal adjustment, according to data released Thursday by the Bureau of Labor Statistics (BLS). Excluding food and energy, the CPI rose 0.2% from the prior month.

Core inflation, which removes food and energy prices, rose 4.7% on a yearly basis. The energy index decreased 12.5% for the 12 months ending July. It helped balance out the overall index, noted George Ratiu, chief economist at Keeping Current Matters.

Fed officials in July lifted interest rates to a 22-year high, hoping to cool the economy. Chairman Jerome Powell reiterated that the Fed would be watching inflation and other economic readings as the FOMC weighs raising rates again in mid-September. 

Indices that increased in June include shelter, motor vehicle insurance, education, and recreation. The indices for airline fares, used cars and trucks, medical care, and communication were among those that decreased over the month.

The index for shelter was by far the largest contributor to the monthly all items increase, rising 0.4% month-over-month, similar to June. Overall, it accounted for over 90% of the total increase in the all items less food and energy index. According to the CPI data, the inflation rate excluding shelter was just 1.0% in July, said Bright MLS Chief Economist Dr. Lisa Sturtevant.

Simultaneously, the index for rent rose 0.4% in July, and the index for owners’ equivalent rent increased 0.5% over the month. The index for lodging away from home decreased 0.3% in July after falling 2.0% in June.

The shelter inflation figure is highly imperfect. The BLS’s CPI metric only measures in-place rent and not asking rents. Since most renters see a change only once per year, the index lags significantly from asking rents on new leases. 

“There’s more shelter inflation deceleration in the pipeline this year, which bodes well for a continued slowdown in inflation,” said First American Deputy Chief Economist Odeta Kushi.

According to data from Apartment List, monthly rent growth already peaked this year. Average rents in August fell from where they were last year, announcing the first year-over-year decline since early in the pandemic. Meanwhile, vacancy rates are rising to more typical levels. To Bright MLS Chief Economist Dr. Lisa Sturtevant, these changes are not the result of the Fed’s action but rather the consequence of more new residential construction coming on the market.

The Fed’s decision-making is getting more complicated

Another hike in September would move the target federal funds rate to its highest level since March 2001. This scenario remains likely since inflation is still above the Fed’s 2% target. But economic data is providing mixed signals. 

In fact, while prices keep on rising, consumer spending is still strong and consumer confidence has hit a two-year high. Wages are still rising and the unemployment rate is low, but job growth has slowed. The second quarter GDP growth exceeded expectations but manufacturing indices continue to show a slowdown. 

Over the past year, housing data taught us two important facts, noted Sturtevant. First, an increase in supply, not Federal Reserve actions, drives housing costs down. Second, changes in shelter costs take a while to appear in overall inflation measures.  

In Minneapolis, regional inflation is tracking below the Fed’s 2% target. Minneapolis enforced policies designed to significantly increase the housing supply in the region. As a result, rent growth stayed far below the national pace, allowing inflation to be tamed in the city.

Timing matters too, insists Sturtevant. She expects to see declining rents bring inflation down over the coming months, independently from any Fed’s decision.

“There is typically a nine-to-12 month lag between when rents moderate and when the decline in housing costs makes it into the consumer price index,” noted Sturtevant. “Owners’ housing costs are approximated by an ‘owners’ equivalent rent’ metric which tracks closely with rent trends. Based on this data, and given how important shelter costs are to the overall inflation measure, we should expect to see declining rents bring inflation down over the coming months—with or without another Fed rate increase.” 

Home prices, which are still rising in many markets, are not part of the CPI calculation.