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By Kristin Myers, Editor-in-Chief

What's Happening Today

The inflation fever looks like it has finally broken. The Consumer Price Index (CPI) slowed to an annual rate of 8.5% in July—down from the red hot annual rate of 9.1% in June, and lower than the 8.7% economists had expected.

This should bring some relief to all of us, as inflation has been forcing shoppers to spend more money on basic necessities. The drop was largely fueled by a dramatic decline in gas prices, offsetting increases in food and shelter prices. Gas prices dropped 7.7% in July, which will make trips to the pump a lot less painful. However, food prices unfortunately continued to rise, jumping 1.1% in July from the month prior. When you take out the volatile categories of food and gas, the "core" rate of inflation rose 0.3% last month.

But what still remains unclear is how long this inflation cool down will last. The Federal Reserve has been persistently fighting inflation through a series of interest rate hikes designed to slow down economic growth. Based on today's inflation report, it looks like the rate hikes might be starting to have an impact, but we are still a long way from the central bank's inflation target of 2%, so don't expect the rate hikes to stop.

Stocks are surging today, with the Nasdaq up over 2% as investors cheer the slowdown in inflation.

- Kristin

Editors' Picks

Inflation Finally Starts To Cool (The Balance)

What Today's Inflation Report Means for the Federal Reserve (The New York Times)

How Inflation Affects Your Savings Account (The Balance)

Social Security Benefits Are Heading for the Biggest Increase in 40 Years (The Wall Street Journal)

Social Security Retirement Benefits - Things to Know (The Balance)

5 Women on How They Bought a Home on Their Own (The Balance)

Conversations To Have Once Your Teen Starts Earning Money (The Balance)

Term of the Day

Inflation Targeting

Inflation targeting is a monetary policy where the central bank sets a specific inflation rate as its goal. Most central banks use an inflation target of 2%. You might think the economy would do better without any price increases whatsoever, but a low and managed inflation rate is preferable to deflation. That's when prices fall. People would put off purchasing homes, automobiles, and other big-ticket items if prices will be lower later.

The difficulty is in creating the right economic climate to create rising prices. That's where inflation targeting comes in. The federal government spurs economic growth by adding liquidity, credit, and jobs to the economy. Demand outstrips supply if there's enough growth. Inflation occurs when prices rise.

There are two ways to create growth. The Fed does it through expansionary monetary policy to lower interest rates. Congress does it with discretionary fiscal policy that reduces taxes or increases spending.

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