

After months of scorching inflation, things are finally looking a little more temperate. A big part of it is simply falling gasoline prices, but if you look closely at July's Consumer Price Index data, there are more hints that the worst may be behind us in terms of the pace of price hikes.
Driving the news: Overall prices were flat last month (actually, if you prefer not to round, down 0.02%). Core inflation, excluding food and energy, rose 0.3% — below analyst expectations and the softest since March.
Why it matters: One month doesn't make a trend, but if data like this keeps up, it would mean the Fed might not need to drive the economy into the ground to get inflation to tolerable levels.
- That possibility drove markets up sharply this morning.
By the numbers: Over the last year, headline prices are up 8.5% and core inflation has been 5.9%, far above the comfort level of ordinary Americans and the Federal Reserve.
- But the July numbers represent a downshift from the soaring inflation of May and June, which prompted a more hawkish Fed.
- Inflation was pulled down principally by a 7.7% drop in gasoline prices, which have continued to fall so far in August. Other sources of relief included airfare (down 7.8% in July, partly reflecting lower jet fuel prices) and rental car prices (down 9.5%).
The relatively benign July CPI numbers align with other recent data suggesting that inflation might be starting to turn, including falling prices for a wide range of commodities and a survey of Americans' expectations for future inflation plunging last month.
Yes, but: Make no mistake, this relief is mild relative to the run-up in prices over the last year. In the last three months, headline inflation has been an annualized 9.5%, and core inflation 6.8%.
- Fed officials have spoken of the importance of seeing actual inflation come down in a sustained way before declaring victory. A single decent month is nowhere close to achieving that.
- Also, grocery prices rose another 1.3% in July alone, creating a continued rising strain on family budgets. They're up 10.9% over the last year.
What they're saying: "We don't often get pleasant surprises surrounding the U.S. inflation data so July's numbers are something to be cherished," said James Knightly, chief international economist at ING, in a note.
- But "core inflation remains on an upward trajectory due to rising housing rental costs and service sector inflation pressures," he added.
The bottom line: One month of relief beats the alternative. But we're a long way from being able to declare that the inflation crisis is over, and the Fed is unlikely to see the new numbers that way.