The consumer price index rose 8.5% year-on-year in July, below expectations, largely as a result of falling energy prices.

Prices paid by consumers for a variety of goods and services rose 8.5% in July from a year ago, a slower pace than the month before, largely due to a decline in gasoline prices.

On a monthly basis, prices were stable as energy prices fell 4.6% overall and gasoline 7.7%. That offset a monthly gain of 1.1% in food prices and a 0.5% increase in the cost of shelter.

Economists surveyed by Dow Jones expected the CPI to rise 8.7% year-on-year and 0.2% monthly.

Excluding volatile food and energy prices, the so-called core CPI rose 5.9% per year and 0.3% per month, compared to estimates of 6.1% and 0.5% respectively.

Even with the lower-than-expected data, inflationary pressures remained strong.

The jump in the food index brought the 12-month rise to 10.9%, the fastest pace since May 1979. Butter is up 26.4% in the past year, eggs are up 38% and coffee is up more than 20% increased.

Despite the monthly decline in the energy index, electricity prices rose by 1.6% and were 15.2% higher than a year ago. The energy index rose 32.9% from a year ago.

Used vehicle prices fell 0.4% monthly, while clothing prices also fell 0.1%, and transportation services fell 0.5% as air fares fell 1.8% for the month and 7.8 % compared to a year ago.

Markets reacted positively to the report, with futures linked to the Dow Jones Industrial Average rising more than 400 points and government bond yields falling sharply.

“Things are moving in the right direction,” said Aneta Markowska, chief economist at Jefferies. “This is the most encouraging report we’ve had in a long time.”

The report was good news for workers, who saw a 0.5% monthly increase in real wages. The inflation-adjusted average hourly wage was still 3% lower than a year ago.

The cost of lodging, which accounts for about a third of the CPI weighting, continued to rise, rising 5.7% over the past 12 months.

The figures indicate that inflationary pressures are easing somewhat, but still remain near their highest levels since the early 1980s.

Congested supply chains, over-demand for goods over services and trillions of dollars in pandemic-related fiscal and monetary stimulus have all combined to create an environment of high prices and slow economic growth that has put policymakers in trouble.

The fall in gas prices in July has provided some hope after pump prices soared to more than $5 a gallon. But gasoline was still 44% higher than a year ago and heating oil rose 75.6% year-on-year, despite falling 11% in July.

Federal Reserve officials are using a recipe of rate hikes and related monetary policy tightening in hopes of pushing inflation rates well above their long-term target of 2%. The central bank has raised lending rates by 2.25 percentage points so far in 2022, and officials have provided strong indications that more hikes are on the way.

There was good news earlier this week when a New York Fed survey indicated that consumers have scaled back inflation expectations going forward. But for now, the rising cost of living remains an issue.

As inflation accelerates, gross domestic product fell in the first two quarters of 2022. The combination of slow growth and rising prices is accompanied by stagflation, while the two consecutive quarters of negative GDP meet a widely held definition of recession.

Wednesday’s inflation data could rob the Fed of some warmth.

Recent comments from policymakers pointed to a third consecutive rate hike of 0.75 percentage point at the September meeting. After the CPI report, market pricing reversed, with traders now anticipating a better chance of a move below 0.5 percentage points.

“At least this report takes the pressure off the Fed at its next meeting,” Markowska said. “They’ve said they’re ready to make a 75 basis point increase if needed. I don’t think they need to do that anymore.”