Slower inflation is finally here. After months of record-setting gains, the consumer price index showed zero month-over-month growth in July, and a 8.5 percent increase from the year before. While the latter is still close to 40-year highs, it's down from the 9.1 percent reported in June.
The CPI reading beat economists' forecasts to the downside, showing even more deceleration than was expected. This is the outcome long-predicted by many economists who argued that inflation would begin moderating in the near-term, and thus temper the Federal Reserve's need to push up interest rates to cool the economy.
The report comes one day after the New York Federal Reserve's monthly Survey of Consumer Expectations showed that regular Americans were also expecting inflation to slow across categories, from food and gasoline to home prices.
“This is a good number," said Rusty Vanneman, chief investment strategist at Orion Advisor Solutions. "If this is truly the peak in inflation, this could officially signal an economic tide shift that both consumers and investors can appreciate."
Both readings are signals to the Fed that inflation might no longer be spiraling out of control, though additional readings will be necessary to firm up the downward trend, and it won't be clear how exactly the central bank will respond until its next major meeting in late September.
"The market is looking out a few months and seeing a kindler and gentler Fed," said David Russell, vice president of market intelligence at TradeStation Group.
What prices specifically fell? The big ones were in the highly-volatile energy category. Gasoline fell 7.7 percent, and fuel oil was down 11 percent.
Another bright spot: The price of used cars were down 0.4 percent in its first drop since April. Closely connected to the supply-constrained new car market, used cars have played an outsized role in pushing up the overall inflation rate.
In addition, airline fares fell a whopping 7.8 percent from a month earlier, as the summer travel boom begins to wind down.
Of course, inflation remains relatively high overall, and particularly for essential items. Indeed, food prices actually increased 1.1 percent in July, up from 1 percent the month before, while shelter costs (which are weighted heavily in the index) were up a half a percent.
The slowing inflation read dropped just three days after the U.S. Senate passed the Inflation Reduction Act, which combines deficit reduction, public investment in infrastructure and energy projects, and reforms aimed at reducing the price of health care. However, the Congressional Budget Office said the bill will have a "negligible" effect on inflation in the near-term.