Here’s the inflation breakdown for July 2024 — in one chart

Inflation continued to retreat in July, aided by easing price pressures for consumer staples like food and energy and physical goods like new and used cars.

The consumer price index, a key inflation gauge, rose 2.9% in July from a year ago, the U.S. Department of Labor reported Wednesday. That figure is down from 3% in June and the lowest reading since March 2021.

The CPI gauges how fast prices are changing across the U.S. economy. It measures everything from fruits and vegetables to haircuts, concert tickets and household appliances.

“I think it’s right down the strike zone,” Mark Zandi, chief economist of Moody’s, said of the CPI report.

Perhaps the most important thing for consumers is inflation for groceries “continues to grow very slowly,” Zandi said.

Combined with similar good news for other necessities like gasoline and market rents for new tenants, “that’s really encouraging news, particularly for the lower-income consumers that are the most hard pressed,” he added.

The July inflation reading is down significantly from the 9.1% pandemic-era peak in mid-2022, which was the highest level since 1981.

It’s also nearing policymakers’ long-term target, around 2%.

“We think we’re though the worst of it from an inflation perspective,” said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

The U.S. Federal Reserve uses inflation data to help guide its interest rate policy. It raised rates to their highest level in 23 years during the Covid-19 pandemic era, pushing up borrowing costs for consumers and businesses in a bid to tame inflation.

Recent labor market data has spooked some investors, who fear it signals a U.S. recession may be near. Many economists say those concerns are overblown, at least for now.

Nonetheless, easing inflation coupled with a cooler labor market make it likely that Fed officials will start cutting interest rates at their next policy meeting in September, economists said. Doing so would reduce borrowing costs, helping buoy the economy.

“In short, this CPI report represents more good data and adds to the evidence supporting a [0.25 percentage point] September rate cut,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Wednesday.

Housing is the one major impediment keeping inflation elevated above the Fed’s target right now — on paper, at least, economists said.

Shelter is largest component of the CPI, and therefore has an outsized effect on inflation readings.

The shelter index has risen 5.1% since July 2023, accounting for more than 70% of the annual increase in the “core” CPI, the BLS said Wednesday. (The core CPI is economists’ preferred gauge of inflation trends. It strips out food and energy costs, which can be volatile.)

After declining to 0.2% in June on a monthly basis, shelter inflation jumped back to 0.4% in July, the BLS reported.

Housing inflation moves up and down at glacial speed due to how the government measures it, economists said. Such data quirks mask positive news in the real-time rental market, which has seen inflation flatline for about two years, Zandi said.

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Excluding shelter — which is likely warranted given measurement issues — “we’re at the Fed’s target and then some,” Zandi said.

“Mission accomplished, in my view,” he said of the fight against inflation.

After stripping out shelter, the CPI rose 1.7% in July, below the Fed’s annual target.

Economists broadly expect shelter CPI inflation to continue to throttle back slowly given prevailing trends for market rents.

Motor vehicle insurance, medical care, personal care and recreation are some other indexes with “notable” increases over the last year, according to the BLS.

Prices in those categories are up 18.6%, 3.2%, 3.4% and 1.4%, respectively.

A surge in new and used car prices a few years ago is likely now fueling high inflation for car insurance premiums and vehicle repair, since it generally costs more to insure and repair pricier cars, economists said.

Insurance inflation should ultimately fade alongside falling car prices, they said. New vehicle prices are down 1% over the past year, and those for used cars and trucks have declined almost 11%.

Egg prices — which had surged in 2022 due to a historic outbreak of bird flu — are rising again following a reemergence of the deadly disease. They’re up 19% from a year ago.

Other food categories including bacon and crackers are up over the past year (by 8.5% and 3%, respectively), but their prices fell during the month of July, suggesting more potential declines ahead.

Overall annual grocery inflation was 1.1% in July, down from an average 11.4% in 2022, which was the highest since 1979.

Inflation for physical goods spiked as the U.S. economy reopened in 2021. The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining out and entertainment.

It is a different story now. Goods inflation has largely normalized, while the services sector is a fly in the ointment, economists said.

However, services inflation — generally more sensitive to labor costs — should ease further due to a slacker job market and declining wage growth, economists said.

High interest rates have also served to reduce overall inflation by reducing demand, Seydl said.