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.

Inflation guides Fed interest rate policy

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.

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