One Good Inflation Report Isn’t Enough

Prices, on average, didn’t go up in July. That’s terrific news—and much better than I had expected. The Federal Reserve should still continue its aggressive attack on inflation with another 75-basis-point hike at the September meeting. Taken together with recent data suggesting continued inflationary momentum, some easing of recession concerns, and the de facto easing of monetary policy in recent weeks, the case is even stronger.

July was a reprieve for American families. Gasoline prices fell by 80 cents a gallon. Consumers got more relief on everything from airfares to hotel lodgings. Prices are still very high, but that is not a problem that can be solved in a single month.

Most of that relief, however, came from favorable volatility—the flip side of the unfavorable volatility of previous months. Taking out food and energy, core inflation rose 0.3% in July. That is very low compared with recent months but still a 3.8% annual rate, much faster than most anyone was expecting six months ago and well above the Fed’s target. Other inertial measures—trimmed mean and median CPI—rose at around a 6% annual rate in July.

Of course the Fed shouldn’t make decisions on a single month’s data. Just as the incredibly high inflation in May and June was likely an aberration that overstated underlying inflation, the July numbers probably understate them. Add that personal-consumption-expenditure inflation was higher than expected since the last Federal Open Market Committee meeting and wage growth is either staying very high or increasing. It would be hard to make the case that the underlying inflation rate in the economy is lower than 4%.