US inflation will likely stay high even as gas prices fall

WASHINGTON (AP) Americans could finally get a break from ever-rising prices if inflation holds up a bit, despite expectations of several months of painfully high inflation.

   Thanks to lower gas prices, the government's inflation report for July, released Wednesday morning, is expected to show prices rose 8.7% from a year ago, still accelerating, but slowing from the 9.1% year.  Figure of the year.  which was the highest in four decades in June.

   Economists' forecasts, if proven correct, will lead to hope that inflation will peak and that the trend of punitively high prices is starting to ease a bit.  There are other promising signs of slowing inflation.

   At the same time, a range of other economic developments are likely to intensify inflationary pressures.  The pace of hiring has been strong and average wages have grown rapidly.  And even as gas prices have fallen, inflation in services such as health care, rent and restaurant meals is accelerating.  Price changes in services are sticky and not as smooth as they would be for gas, food or other goods.  These trends suggest that overall inflation will not slow down anytime soon.

   President Joe Biden has already pointed to lower gas prices as his policies, such as draining oil from the nation's strategic reserves, are helping the domestic budget cope with higher costs, especially for low income families.  .

   Yet while Republicans will push ongoing high inflation as a top campaign issue in this fall's election, high prices have sharply eroded Biden's approval rating.

   On Friday, the House is set to give final congressional approval to the revitalized tax and climate package called for by Biden and Democratic lawmakers.  The bill, which aims to lower drug prices by, among other things, allowing the government to negotiate Medicare drug prices, is expected to reduce the federal budget deficit by $300 billion over a decade.

   Yet economists say the measure, which its proponents call the Deflation Act, will have minimal impact on inflation in the next several years, although price increases may slow later this decade.

   Economists forecast Wednesday's inflation report that consumer prices rose 0.2% from June to July, according to FactSet.  This would represent a sharp decline from the 1.3% jump in May to June.

   But barring volatile food and energy categories, so called core inflation is more likely.  Economists forecast that core prices rose 0.5% in July, still a sharp rise, though down from 0.7% in June.  Such an increase would push core prices to 6.1% in June, up 5.9% year-on-year from a year earlier.

   If headline inflation slows in July, gas pump prices will see a 16% drop in mid-June, when gas will hit the national average of $5 a gallon.  The average price fell to about $4.20 by the end of July and was just $4.03 as of Tuesday.  Continued declines mean lower gas prices will push inflation down further in August.

   Other commodities may also have helped push prices higher in July.  Food prices, although they have continued to rise, may have been at a slower pace than in June.  Prices for used cars, clothing and rental cars may also drop.

   Federal Reserve Chairman Jerome Powell has said the Fed needs to see a decline in monthly core inflation readings before the Fed can consider stopping interest rate hikes.  While the Fed tracks inflation more closely separately, it also monitors the data in Wednesday's report, known as the consumer price index.

   The Fed has raised its benchmark short term rate at each of its last four rate setting meetings, including a three quarter point hike in both June and July, the first major increase since 1994.  The government released the blockbuster jobs report for July on Friday.  528,000 jobs were added, rising wages and the unemployment rate matching a half-century low of 3.5%, raising expectations that the Fed will announce another three quarter point hike at its next meeting in September.

   The Fed will raise rates several times this year, from 3.5% to 3.75%, but will eventually have to cut rates next summer, as traders expect higher rates to trigger a recession, financial markets say.

 Supply chains are shrinking, driving up prices for cars, furniture, appliances and other goods.

   According to Oxford Economics, the number of ships waiting to unload at the Port of Los Angeles/Long Beach has declined for the sixth consecutive month.  Shipping costs, including trucking and rail services, have generally gone up or down, Oxford said, although they remain high.

   And a decline in Americans' expectations of future inflation could also keep higher prices from freezing.  Such expectations may be self-fulfilling.  If people believe that inflation will remain high or worsen, they may take steps such as demanding higher wages which can drive prices up in a self-perpetuating cycle.  

   But a survey released Monday by the Federal Reserve Bank of New York showed Americans now expect lower inflation over the next few years than they did a month ago.  Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said lower inflation expectations may cause the Fed to react less aggressively to reports, such as last month's hiring hike, that suggest the economy is still strong.  And inflation may remain high.

   This is a moderately good sign, Ma said of the inflation expectations data.  This gives them less room not to take a more aggressive approach.