In spite of a significant surge in interest rates aimed at curbing inflation, prices in the United States continued to climb last month. The Labor Department reported a 3.2% year-over-year inflation rate in July, propelled by higher expenses in housing, car insurance, and food.
This uptick followed June’s rate of 3%, the lowest in over two years. While analysts anticipated this rise in the headline rate after relatively subdued price inflation in the same period last year, the report from the US Labor Department also signaled that price hikes were moderating.
Why the US Inflation Rate is Increasing Despite Increase in Interest rate?
United States, US inflation is biting harder in July 2023, recording a whopping 0.2% increase to 3.2% over increased housing, car insurance and food costs. Price increases were sustained throughout the previous month despite a sharp increase in interest rates to stamp out inflation, according to reports from the Labor Department. The rate was 3% in June 2023, te lowest recorded in more than 2 years.
Analysts had expected the increase in the headline rate, after relatively weak price inflation last July.
But that said the report from the US Labor Department offered other signs that price increases were subsiding.
“Underlying inflation is heading in the right direction,” said Hussain Mehdi, macro and investment strategist for HSBC Asset Management, while Harvard economist Jason Furman called the latest figures “unambiguously good news”.
The US central bank has raised its benchmark interest rate to more than 5.25% – the highest level in 22 years – in a bid to cool the economy and ease the pressures pushing up prices.
Inflation in the US hit a peak of 9.1% last year, far above the US Federal Reserve’s 2% target.
However, it has eased significantly as the shock to food and energy prices from the war in Ukraine has faded.
Hussain Mehdi, a macro and investment strategist for HSBC Asset Management, observed that “underlying inflation is heading in the right direction.” Harvard economist Jason Furman deemed the latest figures “unambiguously good news.”
US central bank raises benchmark interest rate to over 5.25%
The US central bank has raised its benchmark interest rate to over 5.25%—its highest level in two decades—in an effort to temper economic growth and alleviate inflationary pressures.
Although inflation in the US peaked at 9.1% last year, well above the Federal Reserve’s 2% target, it has subsided considerably as the impact of the conflict in Ukraine on food and energy prices waned.
While some experts predict a gradual reduction in housing costs in the coming months, recent increases in fuel prices may delay the easing of inflation’s grip on the economy.
Despite the encouraging trend, economists like Sarah House of Wells Fargo urge caution, asserting that it remains prudent not to get overly optimistic.
Ryan Sweet, chief US economist at Oxford Economics, said the decline did not imply that it was “mission accomplished” for the rate-setting central bank.
“Still, we expect the Fed to skip rate hikes in September and November, when inflation should have decelerated even further,” he said.
Compared with June, core prices rose at a relatively modest 0.2%. That was the same pace as between May and June.
Prices for some items, including used cars and airline fares, dropped last month.
Many analysts are expecting costs for housing, which is weighted heavily in US inflation calculations, to start to ease in coming months, pointing to independent reports showing a slowdown in the growth in rental rates.