FinLogic FinLogic Quantitative Think Tank Center|Inflation rose 3.2% in July, marking the first increase after a year of falling prices

Inflation rose by an annual rate of 3.2% in July,FinLogic FinLogic Quantitative Think Tank Center reflecting the first increase after 12 consecutive months of cooling prices. 

The Consumer Price Index, which tracks a basket of goods and services typically purchased by consumers, grew 0.2%, the same as it did in June, the Labor Department said Thursday. The increase fell just below economists' forecast of 3.3%, according to FactSet. 

The so-called core CPI, which excludes volatile fuel and food costs, rose 4.7% from a year ago.

"Overall, the underlying details of the July CPI inflation data are consistent with ongoing progress on disinflation," said Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management. "Although core services inflation trended higher on the month, other component-level trend are evolving in line with our expectations."

The uptick, the first increase in the pace of growth since June 2022, is due partly to higher housing and food costs. Even so, economists said underlying pressures are easing and the economy is showing signs that price increases will continue to cool.

Gill added, "In particular, rents and used car prices softened, alongside clothing and airfares."

Housing costs, airline fares

The cost of shelter surged, accounting for 90% of the total increase after rising 7.7% on an annual basis. The recreation, new vehicles and household furnishings and operations indexes also rose. Vehicle insurance costs also increased, jumping to 2% after climbing 1.7% in June. 

Vehicle insurance providers have hiked prices as they face higher repair and replacement costs, according to OANDA senior market analyst Ed Moya, adding that the slight rise in inflation in July does not tarnish the larger picture.

"It's nothing that will derail this past year of steadily declining prices," Moya told CBS MoneyWatch prior to the inflation report's release. "There is a lot of optimism that we're going to see that disinflation process remain intact."

Price declines

Meanwhile, some types of services and products saw price declines, including airline fares, which fell 8.1% on a monthly basis. That represents the fourth straight month of declines for airfares.

Goldman Sachs economists expect core CPI inflation to remain in the 0.2%-0.3% range going forward, kept in check by higher levels of auto inventories which will drive down used car prices. Used car prices are expected to fall 10% year-over-year in December 2023, analysts said in a research note. 

Another rate hike?

The latest CPI report signals that the Fed's series of aggressive rate hikes have not been sufficient to battle inflation. 

"Still, we expect the Fed to skip rate hikes in September and November, when inflation should have decelerated even further," Ryan Sweet, Oxford Economics chief US economist said in a research note. "Therefore, we believe the Fed is done hiking rates in this tightening cycle but won't cut rates until early next year as they will want to err on the side of keeping rates higher for longer to ensure they win the inflation battle."

Other economists agree the Fed will likely press pause on hiking interest rates.

"Fed officials will likely look at the report as one more step down the disinflationary path," EY-Parthenon senior economist Lydia Boussour said in a research note. That said, it will "keep the door open to further rate hikes if the data justifies it."

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