July inflation drops below 3% as Fed considers September rate cut

The annual inflation rate fell below 3% in July for the first time in over three years, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).

On an annual basis, prices rose 2.9% in July, a slight softening from the 3.1% growth the previous month. On a monthly basis, prices increased 0.2% after dipping 0.1% in June. The last time the overall CPI inflation rate was less than 2.9% was in March 2021. Core inflation, which excludes more volatile food and energy prices, increased 0.2% monthly in July.

Inflation is moving closer to the Federal Reserve’s 2% target, but prices remain high on many essentials. The stickiest piece of the puzzle remains shelter costs, which rose by 0.4% in July and accounted for 90% of the monthly inflation increase. It also rose more than 5% over the past year.

“That’s significant as it represents an outsized part of the index, but shelter costs are also notoriously hard to measure accurately and are often perceived to move with a lag,” according to Jim Baird, Planet Moran Financial Advisors chief investment officer. “Other indicators suggest shelter costs are well positioned to fall further in the months ahead.”

Still, July’s inflation reading will likely give the Federal Reserve the evidence to green-light a rate cut in September and may trigger additional cuts before the year ends.

“Finally, the rate of price increases at the cash register continues to slow down after a couple of years of painful surges, signaling a victory for the Fed’s monetary policy,” CoreLogic Chief Economist Selma Hepp said. “This means for the average American that the Fed will likely cut interest rates next month, which will slightly bring down the cost of borrowing; a good step for auto and home sales, in particular.”

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Car insurance rates are finally slowing down

Consumers may start to see some easing in car insurance costs, one of the greatest drivers of overall inflation for months, according to Jerry’s Vice President of Insurance Operations Josh Damico. Although July’s 18.6% increase is still hard on consumers’ wallets, Damico said it is encouraging that cost spikes are finally slowing.  

Insurance costs have skyrocketed in the last few years as inflation has driven up the costs of auto repairs and drivers submit more extensive claims. However, car repair costs and vehicle prices are stabilizing, which offers signs of hope, Damico said.

“Several carriers I’ve spoken with have started lowering rates, and many more in our network are telling us they’re re-evaluating increases they have taken or had planned to take in the future,” Damico said. “It seems we’ve turned a critical corner and American drivers can expect some relief.”

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Mortgage rates head in the right direction

Mortgage rates have moved in sync with the positive economic indicators and it becomes more apparent that the Fed will begin to ease its monetary policy this year.

The decline in mortgage rates, combined with a growing supply of housing inventory, should help increase prospective homebuyers’ appetites and give existing homeowners the opportunity to refinance.

“In the medium-run, we expect the economy to land softly and housing inventory to continue to recover,” Realtor.com Senior Economist Ralph McLaughlin said. “This should put downward pressure on mortgage rates this fall and winter and will set the stage for a much better season for homebuyers in 2025.”

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