Is inflation whipped now?

The financial press is cheering that Wednesday’s inflation report makes an interest-rate cut next month a fait accompli. Go, Jay, go. Yet while cooling inflation shows that the Federal Reserve’s monetary medicine is working, Chairman Jerome Powell’s caution to date has been warranted.

The Labor Department’s consumer-price index (CPI) rose 2.9% from a year ago and 0.2% in July. The former is the smallest figure since March 2021, but the latter is an increase from the May and June readings. Over the past six months, consumer prices have risen at an annual rate of 2.4%. The Fed’s inflation goal remains 2%.

Core inflation, excluding energy and food, was 3.2% year over year and 0.2% in July. Falling prices for goods have been offset by rising prices for services, especially shelter. Rents climbed 0.5% in July, which is an acceleration from previous months. One reason might be that more people can’t afford to buy homes and are driving up demand for rentals.

And while declining car prices are great if your jalopy breaks down, Americans are paying much more than they did a year ago for a range of items, including auto insurance (18.6%), childcare (5.1%), fast food (4.3%), and internet services (3.9%). Real average weekly earnings fell 0.2% last month, owing to a decline in hours worked.

Markets seem to think inflation is whipped and the Fed should start worrying about being late to cut rates. But Mr. Powell was right to postpone easing policy earlier in the year, as inflation readings ticked up. Cutting rates in September might make sense, though inflation still isn’t dead, and prudence is advised.

One worrisome sign is that prices for many goods climbed last month. The Labor Department’s producer-price index also showed an acceleration in goods prices during July. Rising asset prices this year suggest monetary policy isn’t all that tight, and a “wealth effect” might be buoying consumer spending.

The economy doesn’t show signs of an imminent recession. Best for the Fed to use the running room it now has to keep reducing its $7.2 trillion balance sheet and stay on a path to normalize monetary policy.