The numbers: A key gauge of U.S. inflation fell 0.1% in July thanks to tumbling gasoline prices, marking the first decline in more than two years and giving Americans some relief from a rapidly rising cost of living.

The drop in the so-called personal-consumption price index was the first since April 2020, when the U.S. economy was locked down after the initial outbreak of the coronavirus.

Economists polled by The Wall Street Journal had predicted no change in July.

A narrower measure of inflation that omits volatile food and energy costs, known as the core PCE, edged up 0.1% . That was below Wall Street’s 0.2% forecast.

Read: Consumer spending barely rises — but mostly because gas is cheaper

Key details: The rate of inflation over the past year dropped to 6.3% from 6.8% in the prior month.

The core rate of inflation edged down to 4.6% from 4.8% in the 12 months ended in July. It had touched a 40-year high of 5.3% in February.

The Federal Reserve views the PCE index as the best barometer of inflation trends. Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their behavior in response to higher prices.

They might substitute cheaper goods such as ground beef for more expensive ones like ribeye to keep their costs down, for example. Or stay at a cheaper “airbnb” instead of a fancy hotel.

The CPI showed inflation rising at a 8.5% yearly rate in July, down from a nearly 41-year high of 9.1% in the prior month.

Big picture: The economy has slowed because of the squeeze on consumers from high inflation as well as rising U.S. interest rates. The Federal Reserve is raising the cost of borrowing to try to slow demand in the economy and drive inflation lower.

The Fed’s newly aggressive posture, however, threatens to tip the economy into a second recession in three years.

Looking ahead: “The open question is whether the Fed can calibrate its rate increases finely enough to push inflation down to 2% over the next couple of years, but without pushing the economy into recession,” said chief economist Gus Faucher of PNC Financial Services in Pittsburgh, PA.

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.12%

and S&P 500
SPX,
-0.23%

were rose slightly in Friday trades ahead of a major speech by Fed Chairman Jerome Powell.

Source