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July prices give hope the economy may come under control without going into recession

MARY LOUISE KELLY, HOST:

Gasoline and groceries got more expensive last month, but the price of most other goods was down. That is encouraging hopes that the Federal Reserve may be able to bring inflation under control without tipping the economy into recession. The stock market rallied after today's cost of living report from the Labor Department. The Dow Jones Industrial Average jumped more than 400 points this morning, then gave up most of those gains as today unfolded. We're going to talk through all this with NPR's Scott Horsley. Hi, Scott.

SCOTT HORSLEY, BYLINE: Hi.

KELLY: And NPR's David Gura. Hey there, David.

DAVID GURA, BYLINE: Hey, Mary Louise.

KELLY: OK, Scott, you kick us off. The headline of this report today was a modest rise in inflation last month, but I guess the details were more encouraging.

HORSLEY: That's right. Annual inflation did rise last month. For the first time in a year, it was 3.2% in July, up from 3% the month before. But you shouldn't read that as inflation picking up steam. It's kind of a mathematical illusion caused by one very low monthly reading last summer that's now dropped out of the calculation. Inflation has actually been cooling off in recent months. And in fact, if you look just at the last three months, prices are going up at an annual rate of just under 2%, and some prices are actually coming down.

KELLY: Well, you say that, but I was at my local Safeway grocery store last weekend, and it sure didn't feel like that. Which prices are going down?

HORSLEY: Yeah. Gas and groceries are getting more expensive, but goods overall are getting cheaper. We saw a sharp drop in the price of used cars last month, and we expect those to keep on falling. Airfares dropped more than 8% in July for the second month in a row. I booked a flight home to Colorado in early July and was pleasantly surprised by the low fare.

GURA: I'm going to jump in here to say I noticed that back in June, Scott, when I bought tickets to Maine, and I got to admit I was pretty taken aback by it.

HORSLEY: Yeah. Rents are still going up but not as fast as they had been. And we've also seen some moderation in the price of services like, you know, getting your car repaired or going to the dentist. Service prices are largely driven by wages, so they tend to be stickier than other prices. The big question is whether service inflation will come down enough to bring overall inflation under control, especially if goods prices start to level off or even go up again.

KELLY: Another big question, David, is what the markets are going to do with all this. It looks like Wall Street liked this report today.

GURA: Yeah. The reaction was pretty positive. These inflation numbers were really in line with what Wall Street expected and what Wall Street wanted to see. Stephen Juneau is an economist at Bank of America, and he told me that even though inflation is still above the Fed's target of 2%, he's happy with its trajectory.

STEPHEN JUNEAU: I think the direction of travel right now is really moving in the right direction, and that is encouraging on the inflation front.

GURA: So looking at markets, you know, after the government released these data, futures moved higher. Stocks jumped right out of the gate, right after the opening bell about an hour later. And, yes, as the day went on, markets lost some of the ground they gained, but all three indexes ended the day higher. And Wall Street is hopeful the Fed will be able to manage to pull off what you mentioned at the top, Mary Louise - that soft landing. And this inflation report made investors feel more confident the Fed will be able to get inflation under control without causing a downturn. And it made them confident the Fed is going to be happy enough with the progress it's made to stop raising rates.

KELLY: Well, Scott, you're the Fed expert here. Is that what you're expecting the Fed to do - stop raising rates after all of these raising of the rates?

HORSLEY: You know, even before this inflation news today, markets were betting the Fed would leave interest rates unchanged. And oddsmakers now see that as even more likely. We've actually been hearing mixed messages from Fed officials in recent days. Some have said they think more rate hikes may be needed. Others say they're ready to stand pat.

GURA: Wall Street is going to pay attention to this big conference that's coming up of economists and central bankers at the end of August. It's in Jackson Hole, Wyo. And maybe Jay Powell - I don't know, Scott - tipped his hand a little bit more than he did after the last Fed meeting.

HORSLEY: You know, a year ago, Powell used a speech at Jackson Hole to deliver some tough medicine. He promised the Fed would continue to raise interest rates and keep at it as long as necessary to bring inflation down. Assuming Powell does head for the Tetons this year, I think he'll be more guarded. The Fed chairman, like most of his colleagues, wants to keep his options open, and we are going to get another monthly price check before the Fed's next interest rate decision in late September. The good news so far is the economy and especially the job market have weathered the Fed's rate hikes in pretty good shape. Ironically, it's the growing confidence in a soft landing that's one reason oil prices have been creeping up. And, of course, that's a factor driving prices at the pump higher.

KELLY: Yeah, at the gas pump. OK - so many crosscurrents here. David, are you seeing any red flags?

GURA: Yeah, there are plenty of things that could go wrong. And markets have been volatile. I mean, just a few months ago, we had those three big bank failures. We're still seeing the fallout from that. This week Moody's downgraded almost a dozen regional banks. And beyond that, there are warning signs about the economy in China. President Biden just signed that executive order restricting some U.S. investment there.

HORSLEY: On the plus side, we have now had several months in a row in which wage gains were outpacing inflation. So workers have seen their real purchasing power increase. On the negative side, a lot of those purchases are being made with plastic. This week the New York Fed reported that credit card balances topped a trillion dollars in June for the first time ever - not a big deal if you pay it off every month. But for those who carry a balance from month to month, that's very expensive debt, with the average interest rate on credit cards topping 20%.

KELLY: David, you get the last word. How are markets going to sort all this out?

GURA: So we saw that pop today in stocks. And if we step back, stocks are up, year to date, pretty significantly - the Nasdaq by more than 30%, the S&P 500 by almost 17%. And I got to mention bonds because yields are still high. That is putting a lid on the economy. It's making it more expensive to borrow. The rate on a 30-year fixed-rate mortgage is almost 7% now, Mary Louise. Again, what will be critical are the economic data. If past is prologue, we will see more gains if those data keep pointing to a soft landing.

KELLY: Our economic gurus David Gura and Scott Horsley. Thanks to you both.

GURA: Thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.