July saw a setback for Biden and the Fed as inflation rose to 3.2%.
Inflation Rises to 3.2%: A Promising Turnaround
In a surprising twist, inflation has experienced a slight uptick, reaching a 3.2% rate for the year ending in July. This marks the first increase after a full year of declines, according to the Bureau of Labor Statistics. Investors had anticipated this slight rise, which aligns with expectations.
Mortgage Rates Soar to 7%: A Troubling Sign for the Market
On a month-to-month basis, inflation remained steady at 0.2%, in line with predictions. The Federal Reserve has been diligently raising interest rates for over a year, and their efforts have proven successful in significantly reducing inflation since the tightening cycle began in earnest last March.
The central bank’s target rate now stands at 5.25% to 5.50%, with the most recent rate hike occurring last month, potentially marking the final increase in the near future. However, “core inflation,” which excludes volatile food and energy prices, has risen to 4.7% for the year ending in July.
The impact of soaring inflation has taken a toll on households over the past two years, eroding support for President Joe Biden and his economic agenda. Republicans have seized upon rising prices as a weapon to criticize the administration, attributing inflation to significant spending bills like Biden’s pandemic relief legislation.
Nevertheless, recent positive economic data has prompted the administration to shift its messaging strategy, highlighting the bright spots in the economy. The White House has embraced these developments as evidence of the effectiveness of “Bidenomics.”
Labor Market Remains Resilient
Contrary to expectations from just six months ago, the labor market continues to thrive, defying fears of an entrenched recession. Although job growth slowed to 187,000 last month, it remains positive, and the unemployment rate sits at a historically low level of 3.5%, matching pre-pandemic figures.
Furthermore, second-quarter GDP growth surpassed consensus expectations, reaching an annual rate of 2.4%. This demonstrates that the economy continues to flourish despite the Federal Reserve’s decision to raise interest rates to their highest level in over two decades.
Over the past 17 months, the Fed has aggressively increased rates, at times implementing revisions three times larger than the typical increase. However, given indications of a slowing labor market and declining inflation, many economists anticipate that last month’s quarter-point hike will be the final one this year.
During a recent press conference, Fed Chairman Jerome Powell revealed that central bank staff no longer anticipate a recession, further reinforcing the belief that the Fed can achieve a coveted “soft landing.” This announcement holds significant weight, as just months ago, it was revealed that Fed staff had projected a mild recession for this year.
Despite the overall resilience of the economy in the face of rate revisions, consumers have felt the impact through rising mortgage rates. This has made housing increasingly unaffordable and has hindered the previously thriving housing market. Mortgage rates have now surpassed 7%, reaching their highest point since November and a far cry from the sub-3% rates that consumers secured during the peak of the pandemic.
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