Inflation rises for the first time in 12 months—but it’s not as bad as it looks

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 26, 2023.
Aaron Schwartz | Getty

After a year of monthly declines, the year-over-year inflation rate has risen from 3% to 3.2%, still well above the Federal Reserve's target of 2%, according to the Labor Bureau's latest consumer index report.

However, the data is not as scary as that might sound.

The increase is partly due to the way energy costs are accounted for in the report, as year-over-year inflation no longer reflects the dramatic climb down from peak prices in June 2022, when average gas prices hit $5 per gallon.

While rising oil prices are an ever-present concern, recent energy price increases have been "amplified in the year-over-year inflation numbers," says Kurt Rankin, senior economist at PNC Financial Services Group.

Similarly, housing costs have cooled in 2023, but there's a months-long lag in the way data is represented in Labor Bureau reports. Moderating prices for houses and rent are expected to help lower core inflation in future CPI reports, according to the Federal Reserve Bank of San Francisco.

To get a better sense of where inflation is headed, the Federal Reserve looks to core inflation, which measures the price of all goods and services excluding volatile food and energy prices.

Core inflation continued to cool by 0.2%, as it did in June, after six months of increases closer to 0.4%. That's a good rate in terms of taming inflation, although it will need to be sustained in the months to come, says Rankin.

In June, Fed chair Jerome Powell said that he didn't anticipate core inflation returning to the central bank's 2% target until 2025.

What the inflation rate means for the cost of borrowing

To combat inflation, the Fed has enacted a series of interest rate hikes since March 2022. These increases raise the cost of borrowing, which discourages spending by both consumers and businesses.

Currently, interest rates are at a 22-year high, with the benchmark federal funds rate at 5.25% to 5.5%.

Yet, despite the interest rate hikes, the economy and the labor market have remained strong. And while consumer spending has shown signs of slowing, it remains resilient, at least for now.

What does this mean for you? Interest rates are expected to remain near 4% through 2024, based on the Fed's own median projections. That means things like credit card interest and auto loans won't be getting cheaper just yet.

So if you're planning to borrow money in 2023 and 2024 — perhaps for a home or a new car — don't expect the Fed to dramatically slash interest rates back down to 2% or 3%.

In the meantime, Powell reaffirmed the Fed's commitment to that benchmark during a July press conference, stating that "we're determined to bring inflation down to 2% over time." He has not ruled out further rate hikes, either.

"I think I think it's appropriate for people to buckle up and be prepared for the possibility that rates do remain higher for longer," says Mark Hamrick, a senior economic analyst at Bankrate.

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This 22-year-old won $2 million in scholarships, graduated from Princeton and lives debt-free in NYC
This 22-year-old won $2M in scholarships and graduated from Princeton debt-free