Is inflation finally on the decline in the US? It’s complicated

Economists say inflation possibly hit its peak, and there are signs the pressures behind it are easing – but it’s hard to say what’s next

What goes up must come down. Right? Inflation has been soaring over the last year. But price rises in July were “just” 8.5% higher than what they were last July, down from a 9.1% yearly rate in June. Perhaps the worst is over?

Americans have been feeling the hit at the gas pump, grocery stores, restaurants and when planning vacations. In response, the Federal Reserve raised interest rates from near zero to between 2.25% and 2.5% as it tries to drive inflation down to its target rate of 2%, but it is unclear when that goal can be reached.

What is clear is that when and if prices do start to fall, it is going to take time, and in some sectors, a lot more time than in others. Nor is declining overall inflation a guarantee that prices will not rise in some areas again.

Gas and energy

The energy sector, particularly gasoline prices, have played a huge role in soaring inflation rates. Compared to last year, energy prices were up 41% in June and gas prices alone were up 60%.

There are signs of relief, at least in the near future. The gasoline index fell 7.7% in July, the labor department reported on Wednesday. After peaking at $5 a gallon nationally in the beginning of summer, gas prices finally started to come down in June. Gas is now under $4 a gallon in over 19 states as demand has softened over the last few weeks.

“We’ve seen demand begin to come down as gas prices got so expensive earlier this summer,” said Sarah House, a managing director and senior economist at Wells Fargo. “It began to change behavior.”

Americans are using less gas this summer: gas consumption in the US is now over 1m barrels a day below levels that were seen in the summer of 2020, which was already lower than what was seen pre-pandemic, according to federal government stats.

Despite falling demand, it is still unclear how long the low gas prices will last. The energy market is extremely volatile. Some analysts have warned that gas prices could go up again in the fall as stricter sanctions against Russian oil are set to start in December. The Opec cartel of oil-producing nations agreed to an increase in oil output that is, seemingly in a snub to Joe Biden, their smallest increase ever.

“We still have fairly elevated oil prices, and we’re still looking at a market that’s pretty tight. There’s not a lot of spare capacity out there,” House said.


Like the energy market, the food sector is highly volatile as it is also sensitive to geopolitical relations and climate. The food index increased 10.9% over the last year, the largest 12-month increase since the period ending May 1979.

A number of factors went into rising food prices, including a highly infectious avian flu that wiped out many chickens across the country. Tyson Foods, one of the largest meat producers in America, said that labor shortages and higher grain prices played a role in rising meat prices.

But there might be some relief coming. The price of major food commodities like corn and wheat have started to go down – at the end of July, Ukraine started exporting grain for the first time since the war – but it will take some time for the lowering of those prices to appear, if at all.

“We’re seeing that the upstream prices of corn and wheat have gone back to where they were prior to the war, but it takes a while for those products to go through the next stage of production,” said Brian Bethune, an economics professor at Boston College. “It has to be shipped and then stocked at the grocery stores, so [the price decreases are] probably going to take a little bit longer.”

Easing has already been seen in the price of beef and pork, which declined starting in June, according to the US Bureau of Labor Statistics. As a result, prices in meats, poultry, fish and egg markets have also declined.


The pandemic induced a shortage of semiconductor chips, which are used in everything from phones to TVs to cars, that is still being seen today.

The shortage is squeezing the car industry. Analysts are predicting that the low number of new car sales, which dropped 12% year-over-year in July, will continue through the end of summer as the supply of cars continues to be sparse. The average price for a new car hit a record $48,000 in June, according to Cox Automative.

In July, Americans were paying 10.4% more for new vehicles and 6.6% more for used cars compared with the year before. That’s a dramatic fall from earlier this year. In January used cars were 44.6% higher than they were at the start or 2021. But it still means prices are rising, and from a high base.

Though the chip shortage does not affect the used car market directly, fewer new cars means people are holding on to their cars rather than buying new ones, tightening the used car market.

The Senate just passed a bipartisan bill that provides $52bn in subsidies to chip manufacturers in the US and investment into developing a more robust domestic chip industry, though any impact from the bill on the car industry will not be seen for some time. Though used car prices showed signs of easing early in the summer, they still remain historically high and will probably remain so for the near future.


When the Fed dropped interest rates to near zero at the beginning of the pandemic, mortgage rates came crashing down, reaching a historic low of below 3%.

With borrowing for a new home being cheaper than ever, and people looking to move to bigger spaces as they worked from home, the housing market boomed. The median sales price of existing homes climbed from $355,000 in May 2021 to $407,600 in May 2022 – the highest average sale price in history. The average price of rent in June went up 5.8% over the previous year.

Since the Fed raised interest rates from 2.25 to 2.5%, mortgages have gotten more expensive. A 30-year fixed mortgage is now nearly 6% – nearly double what it was just a year ago.

As a result, the housing market is starting to cool. Prices are still high, but they are starting to come down. Double the number of homes have a price reduction compared with last year, and while rent is still going up, increases are slowing.

The Federal Reserve chair, Jerome Powell, noted in June that inventory in the housing market is still low, “so it’s still a very tight market”. The cooling in the market is “a bit of a reset”, he said.

“Even though, directionally, things are improving, there’s still a long way to go,” House, the Wells Fargo economist, said. “That’s going to keep the Fed on an aggressive path where it’s not going to be easy to get inflation all the way back to 2%.”

So … now what?

Economists say that it is possible that inflation has hit its peak, and there are good signs that many of the pressures behind inflation are easing, but it is still hard to predict the path that inflation will take.

Some of the prices being seen today, like for gas and homes, will probably continue to go down. But other costs will, in a best-case scenario, stay put.

“What price normalization for a lot of individuals would mean would be for the good that they’re used to buying, they go back to the prices they were used to paying,” said Tara Sinclair, a professor of economics at George Washington University. “But that’s not really feasible. It’s much easier to accept that these new higher prices, on average … are here to stay.”

Sinclair added that deflation – the decrease of prices – is a phenomenon that is actually “associated with really bad economic performances”.

“If the Fed were to target deflation, we would then see massive job losses, a high unemployment rate,” she said. “That’s just too high a cost to pay.”

The process of taming inflation is unpleasant. Fewer people can afford to buy houses or new cars, and businesses have less money to expand. But getting inflation down is necessary for the economy to get back to a healthy balance between supply and demand, Sinclair said.

“We might need to endure this painful medicine now in order to get the economy on a nice, good footing for the long term,” she said.


Lauren Aratani

The GuardianTramp

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