Prices rise 5.4% in July over last year as the economy claws back from pandemic depths

Data released by the Bureau of Labor Statistics on Wednesday showed prices rose 0.5% in July compared with June, a slight easing of the monthly pace of inflation.

For months, the Fed and White House have said inflation will keep climbing as consumer demand surges while supply chains struggle to catch up. Their expectation is that as supply backlogs have time to clear, inflation will settle back down closer to the Fed's 2% annual target.

But that message is increasingly difficult to grasp for households facing rising grocery bills, rent or expensive airline tickets. The longer it takes for supply chains to clear up or for pandemic-battered sectors to reboot, the tougher it may be for consumers to swallow higher prices.

As more people hit the road during summertime, gas prices are on an upward climb, the inflation report showed. On Wednesday, the White House called on global oil producers to boost production.

The cost of many grocery items - including meats, poultry, eggs and dairy - also ticked higher again in July, according to the report. Groceries have been trending higher for well over a year, with the Bureau of Labor Statistics showing a 2.6% rise in the "food at home" category compared with last year.

For the Fed and White House, price challenges are compounded by the fact that inflation can be driven by what people expect it will be in the future. For example, if businesses shift their plans for investment or consumers change their spending habits because they think prices for construction materials or hotel rooms will continue to soar, that behavior could drive prices up, too.

Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute, said it matters to households that "we're on month five of this, and we might be in for another year of it."

"I think the Fed could be less dismissive of the concern," Strain said. "The Fed may be absolutely right to keep its zero interest rate policy. But I think the Fed has been too blasé, too serene, too dismissive of this potential risk."

Meanwhile, Republicans have long argued that inflation is an urgent concern and that the Fed will be too late once it decides prices have reached dangerous levels. Conservatives were also quick to chastise Senate Democrats for adopting a $3.5 trillion budget early Wednesday morning, saying such massive spending will heat up the economy even more.

For now, survey data isn't suggesting baked-in expectations for widespread, sustained inflation over the long term. But the Fed is on alert for any signs suggesting otherwise.

"All the evidence is that it's not happening," Fed Chair Jerome Powell said last month. "But, nonetheless, we have to watch this very carefully. . . . Price stability for us means inflation averaging 2% over time. And so we've got to be very careful about that."

July's top-line inflation figure of 5.4% was the same as the June reading. Economists and policymakers have been looking for any clues that suggest the breakneck pace of price growth is beginning to cool down. But they are also hesitant to jump to conclusions too quickly, especially since there's no playbook for this recovery.

"One month does not make a trend . . . and we know supply constraints persist in various sectors," the White House's Council of Economic Advisers tweeted Wednesday.

A look at used cars illustrates some inflation dynamics at play. Demand for cars is high, but supply has been hampered by ongoing chip shortages. The consequence of that mismatch is hard to miss: Compared with last year, prices for used cars and trucks have soared 41.7%.

But a look at the month-to-month data suggests prices are not climbing as fast as they had been for much of this year. For example, used car prices jumped 10.5% in June compared with May. But in July, they grew only 0.2%, compared with June.

Similarly, the cost of hotels and motels are still high as travelers rebook vacations. But the rate of price growth eased a bit in July compared with June. In June, prices rose 7.9% compared with the month before. In July, they rose 6.8% over the same period.

Still, economists and policymakers are staying alert for any signs of sustained price increases that pulse through the entire economy. For example, rising rents and soaring home prices have concerned some economists who are unsure whether the cost of shelter will fall back down. (Rent rose 0.2% in July, mirroring figures from the month before.)

"We're in a very turbulent space in terms of pricing," Atlanta Federal Reserve President Raphael Bostic told reporters Monday. "There are lots of moving parts, and I'm monitoring that closely."

As Americans hit the road despite the delta variant's looming threat, the increased demand for gasoline has driven gas prices higher. The national average for a gallon of gas was $3.19 on Wednesday, according to AAA, a new high for 2021. That is up more than a dollar from this time in 2020 and up four cents from last month.

"We continue to see very robust gasoline demand for the peak summer driving season," Jeanette McGee, a AAA spokeswoman, said in a statement Wednesday. "The latest demand rate was 2% higher than the same time period in 2019, while gasoline stocks are about 1% below."

Rising gas prices spurred the White House to call on global oil producers to boost production. The Organization of the Petroleum Exporting Countries (OPEC) and its allies have been navigating production cuts since the early days of the pandemic flatted oil demand.

Tyson Foods, one of the nation's largest meat producers, has hiked prices for its restaurant customers amid strong demand, as rising grain, freight, packaging and labor prices dragged on its bottom line, chief executive Donnie King told reporters Monday on the company's earnings call.

Tyson's retail orders have risen 30% compared with pre-covid levels, King said, but the company has dealt with turnover and struggled to fill open positions. Meanwhile, "we have seen accelerating and unprecedented inflation," King said. "So what do you do about that?"

Last quarter, Tyson increased its average price for pork nearly 40%. It raised chicken prices more than 15% and beef prices nearly 12%. This week, it lifted its full-year revenue forecast due to the strong demand for its products. "Costs are hitting us faster than we can get pricing at this point," he told reporters.

Customers will start seeing the difference at supermarkets Sept. 5, when retail price hikes kick in. And more price increases are planned, King said.

When it comes to thinking about prices, leaders at the Fed are tasked with keeping prices stable while also keeping employment high. In the past, the Fed would rush to clamp down on inflation, including by raising interest rates.

But now, even though inflation is climbing faster than expected, the Fed says there is still a long way to go in the labor market, which remains about 5.7 million jobs short of where it was before the pandemic hit in March 2020.

The Fed needs to see significant progress in the labor market before it starts scaling back its support for the markets, including $120 billion a month in bond purchases.

Fed leaders have made clear that they will not rush to "taper" asset purchases, or eventually raise interest rates, until the economy has made significant progress. When it comes to the labor market, economists celebrated the 943,000 jobs added in July as hiring gained speed and employers raised wages to bring people back on the payrolls.

If the economy keeps gaining momentum, economists think the Fed could announce a plan to begin peeling back asset purchases later this year or in early 2022. The Fed has also made clear it will give plenty of warning before it starts to "taper," suggesting an announcement, let alone action, is at least a few weeks or months away.