Inflation Watch: Finally, Inflation Is Back Under 3% (For The First Time In Years)

Inflation is a hot topic of conversation. The past few years, consumers have been digging even deeper into their pockets for everything from groceries to car insurance and even for rent and mortgage payments. 

But this month? We got a win. Prices rose 2.9% over the 12 months ending in July — but that’s the smallest 12-month increase since March 2021, according to the monthly Consumer Price Index released by the U.S. Bureau of Labor Statistics. What else makes this moment so special? The fact that inflation decreased from 9% to 2.9% in just two years without causing a major recession, for one thing. 

But for another, it feels like things might be finally back on a steady track. Some costs are, of course, still high. Housing, for example, is up more than 5% year-over-year this month.

While we can’t promise an easy solution for combatting every aspect of rising inflation rates, we can explain a tool that economists and savvy penny hoarders alike use for watching its ebb and flow. We’ll also explain what it means for the average person and how it changed this month.

What is the CPI?

If you’ve never heard of it, the Consumer Price Index (CPI) is a monthly report released by the U.S. Bureau of Labor Statistics (BLS). It provides a snapshot of critical areas of inflation as they relate to what people buy on a regular basis.

“The CPI covers basic goods we need, like food and energy, plus other items we spend money on, especially services that involve labor costs, like home repairs and personal care,” said Joe Camberato, CEO of NationalBusinessCapital.com. “When the CPI goes up, especially in areas like dining out and services, it means our expenses are increasing, which can affect how much we can buy with our money.”

So how does the BLS get this information? It’s actually pretty interesting.

Each month, the BLS gathers a sample of data from 75 urban locations across the country. It includes 80,000 price quotes from some 22,000 retail and service providers and 6,000 housing units. The data isn’t perfect and notably leaves out numbers from more rural locations. However, the BLS estimates these numbers reflect pricing increases and decreases for 93% of the U.S. population in categories like food, housing, energy and medical care.

Why Does CPI Matter?

The CPI is a useful tool for understanding what aspects of your daily expenses are getting more (or less) expensive. It can come in handy when you’re trying to optimize your budgets, investments and saving strategies.

“Consumers can use the CPI to determine and plan for how their cost of living is going to change over time,” said Cliff Ambrose, founder and wealth manager at Apex Wealth. “By tracking CPI trends, they can adjust their budgets accordingly and anticipate changes in expenses for essentials like housing, groceries and health care.”

Understanding the CPI won’t just help with your budgeting. It may also provide clues as to how and where you should invest your discretionary income.

“If CPI reports indicate rising inflation, consumers may consider investing in assets that typically outperform during inflationary periods, such as real estate, commodities, or Treasury Inflation-Protected Securities (TIPS),” Ambrose said. “Additionally, they may want to negotiate fixed-rate contracts or consider refinancing debt to lock in lower interest rates.”

Now that you understand a bit about the CPI and how you can use it for your own financial benefit, let’s dive into this month’s CPI report.

What Went Up:

Each month, the CPI report reflects data gathered from the previous month. The latest CPI report, which came out in August 2024, reflects survey results for July 2024. Here’s what went up: 

• The CPI as a whole increased in July: The Consumer Price Index for All Urban Consumers (CPI-U) increased in July by 0.2% after decreasing in June. Despite this increase, inflation is finally under 3% for the first time since the pandemic. 
• Food: The food index as a whole increased by 0.2% in July after also increasing by 0.2% in June. This index is further broken down into food-at-home, which increased by 0.1%, and food away from home, which rose 0.2%. 
• Housing: The index for shelter continued to rise in July, increasing by 0.4%. This is part of a bigger trend: The shelter index rose 5.1% over the last year and reflects expenses for homeowners and renters alike. 
• Transportation:The transportation index increased in July by 0.4%, which also is part of a larger trend of an 8.8% increase over the last year. 

Other notable increases: The index for all items less food and energy rose 3.2% over the past 12 months. Other indexes with notable increases over the last year include recreation (up 1.4%), personal care (up 3.4%) and motor vehicle insurance (up 18.6%).

What Went Down:

Here are the categories of the CPI that have gone down in the past month. 

• Medical care: The medical care index fell by 0.3% in July after increasing in June. The sub-index for hospital services also decreased during July (by 1.1%), while the physicians’ services index and the prescription drugs index both increased 0.1%.
• New vehicles: The index for new cars decreased by 0.2%. 
• Used vehicles: The index for used cars and trucks decreased by 2.3%. 
• Commodities: In July, the index for commodities less food and energy commodities decreased by 0.3%.
• Apparel: The apparel index decreased by 0.4%. 

What Stayed the Same:

Energy: The energy index as a whole remained the same in July, with various sub-indexes decreasing and increasing. The gasoline sub-index was the only one to also remain unchanged while decreases were seen in energy services (by 0.1%) and utility (piped) gas services (by 0.7%). Increases were seen in energy commodities (0.1%), fuel oil (0.9%), and electricity (0.1%).

What This Means For You: 

Here are some insights into facing the inflation fluctuations this month.

Housing: Housing has been steadily rising all year for homeowners and renters.

• What this means: Put aside more money for your housing costs, especially if you have an adjustable-rate mortgage, plan on taking on a new mortgage or renewing your lease soon.

Food: Food has become increasingly more expensive over the past year. This is particularly true in the food away from home category, aka dining out, which went up an additional 0.2% in July — part of its upward trajectory of 4.1% this year.

• What this means: Be picky with how you grocery shop and when and where you dine out, as the latter is typically more expensive.

Car insurance: Car insurance costs increased by 1.2% in July and accounts for one of the biggest CPI increases over the past 12 months— up 18.6%.

• What this means: If you’re on the market for a new car insurance policy, check out our guide on choosing the best one.

Larissa Runkle (@therealtorwriter) is a writer and editor living in Colorado. Her work focuses on personal finance, real estate copywriting, and lifestyle guides.