US Inflation Finally Drops Below 3%

Estimated reading time: 3 minutes

In July, the annual rate of inflation rose by just 2.9%, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). That’s a big win for the U.S. economy, marking the first time that the rate has dipped below 3% since 2021.

In the wake of the pandemic, inflation surged, peaking at more than 9% in June 2022. A few months earlier, the Federal Reserve kicked off a series of rate hikes in hopes of cooling inflation without throwing the U.S. into a recession – a scenario economists call a “soft landing.”

July’s number represents a promising sign that the economy may be heading in a positive direction.

What’s Driving Inflation?

Lower inflation is great news. But it doesn’t mean American consumers are out of the woods.

Collectively, prices are increasing at a slower rate than they were. But they haven’t decreased, which leaves the prices of most goods and services far above what they were pre-pandemic. Meanwhile, some costs are still rising substantially.

The price of shelter, which includes rent and comparable homeowners’ costs, increased by 5.1% over the past year. That accounts for 70% of all price increases, excluding food and energy, and highlights the central role of housing as an ongoing financial issue for Americans. The cost of early childcare also rose by roughly 5%, further straining families.

Looking Forward

The American economy has made some significant strides since inflation hit its recent peak, but the persistently high cost of many essentials continues to present a challenge for many.

That noted, wage growth overall has outpaced inflation since 2020. And although the job market has shown signs of softening in recent months, it remains relatively strong compared to the pandemic era.

Both factors have helped drive growth for the U.S. economy, even amid high inflation and interest rates, and they might be enough to help stick the soft landing. Investors widely expect the Fed’s first rate cut at its September meeting, per CME’s FedWatch tool.

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