Prices rose in July at a rate that looked a lot more like the modest inflation of the pre-pandemic era, and less like the price hikes consumers🤪 hav🌊e experienced in the past few years.

The Consumer Price Index, a widely watched measure of inflation, rose 2.9% over the year in July, down from a 3% annual change in June, the Bureau of Labor Statistics said Wednesday. That was the slowest annual inflation rate since March 2021, and below the expectations of forecasters, who had expected a 3% annual increase according to a survey of forecasters by Dow Jones Newswires and The Wall Street Journal.

Slower inflation offers relief to household budgets stressed after years of dealing with higher prices. It also bolsters the case for the Federal Reserve to cut its benchmark fed funds rate when it next meets in September, as it is widely expected to do.

"July’s CPI data continue the run of 'good data' that the Fed wants to see before starting to ease," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary.

ꦡ What𝓰 Were the Forces Behind the Inflation Numbers?

"Core" inflation, which excludes volatile prices for food and energy, cooled to a 3.2% year-over-year change from 3.3% in June. Fed officials pay closer attention to core inflation measures because they're less influenced by things like the weather, which can push food and gas prices up and down without affecting broader inflation trends.

Monthly, total inflation rose 0.2% in July from June, an acceleration from the 0.1% decrease the month before. Nearly 90% of the increase in overall prices was because of a jump in shelter costs, which rose 0.4% over the month, up from a 0.2% increase in June.

One bright spot for conꦕsumers is prices for u🃏sed cars and trucks, which fell 2.3% in July, and are down 10.9% over the year. Gas prices were unchanged in July and are down 2.2% over the last 12 months.

How Does This Impact the Federal Reserve?

The July report comes at a crucial time for the Fed's monetary policy.

Fed officials have been weighing when to begin backing off their campaign of anti-inflation interest rate hikes that started in 2022. By holding the rate at its highest since 2001, the Fed has pushed up interest rates on mortgages and other consumer loans, discouraging borrowing and spending and allowing supply and demand to rebalance.

If the core inflation rate rose at the same pace it did over the last three months, it would make for a 1.6% annual increase, below the 2% rate that the Fed targets, noted Ali Jaffrey, an economist at CIBC.

With the unemployment rate steadily rising in recent months, the Fed is widely expected to increasingly focus on lowering interest rates to boost the economy rather than keeping them high to fight inflation. By law, the central bank is tasked with working to keep inflation low and employment high.