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If inflation has been the biggest threat to U.S. economic growth, then July’s data should provide signs that there’s at least some relief in the pipeline.

Prices were flat for the month as gauged by the items that the Bureau of Labor Statistics tracks for its consumer price index. That marked the first time the aggregate measure hadn’t posted a month-over-month increase since May 2020, when the widely followed index showed a modest decline.

Just a month ago, CPI posted its fastest 12-month gain since November 1982, following a trend that helped send economic growth into contraction for the first half of the year, stirring up talk of a recession.

But with at least the short-term trend indicating the rate of price increases is abating, economic optimism is perking up.

“The whole recession narrative really needs to be put on a shelf for now,” said Aneta Markowska, chief economist at Jefferies. “I think it’s going to be shifting to a stronger-for-longer narrative, which is really supported by a reversal in inflation.”

Markowska, whose forecasts this year have been accurate, sees solid growth in the near term, including a 3% growth rate in the third quarter. The Atlanta Federal Reserve’s GDPNow gauge, which tracks economic data in real time, pointed to a 2.5% growth rate in a Wednesday update, up 1.1 percentage points from its last one on Aug. 4.

However, Markowska also expects pressures to intensify in 2023, with a recession likely in the back part of the year.

Indeed, there was a little bit for both arguments in the CPI report.

Most of the tempering in inflation came because of a fall in energy prices. Gasoline slid 7.7%, the biggest monthly decline since April 2020. Fuel oil tumbled 11% as energy-related commodity prices were off 7.6%.

Transportation services cost increases also came off the boil, with airline fares tumbling 7.8% to reverse a trend that has seen tickets surge 27.7% over the past year.

But there were few other signs of inflation declines in the report, with food costs particularly high. The food index, in fact, rose 1.1% on the month, and its 10.9% pace over the past 12 months is the highest since May 1979.

That’s causing worries at places such as City Harvest, which helps feed needy New Yorkers who have been hit especially hard by price surge that began last year.

“We’re seeing many more children come into food pantries,” said Jilly Stephens, the organization’s CEO. “Food insecurity had been intractable even before the pandemic hit. Now we’re seeing even more people turn to food pantries because of the rising prices.”

Stephens said the number of children seeking food assistance about doubled a year after the Covid pandemic hit, and the organization is struggling to keep up.

“We’re always optimistic, because we are supported by incredibly generous New Yorkers,” she said.

Despite the surging prices, consumers have been resilient, continuing to spend even with inflation-adjusted wages contracting 3% over the past year.

Jonathan Silver, CEO of Affinity Solutions, which tracks consumer behavior through credit and debit card transactions, said spending is at a healthy pace, rising about 10.5% over the past year, though inflation is influencing behavior.

“When you start to look at specific categories, there’s been a lot of shifting in spending, and as a result, some categories are being impacted more than others by inflation,” he said. “People are delaying their spending on discretionary items.”

For instance, he said department store spending has fallen 2.4% over the past year, while discount store spending has risen 17%. Amusement park spending is down 18%, but move theaters are up 92%. Some of those numbers are influenced by rising prices, but they generally reflect the level of transactions as well.

As inflation eases, Silver expects discretionary spending to increase.

“We believe there will be a spike later in the year that will create an upward slope to the spending in key categories where the consumer has been delaying and deferring spending,” he said. “Consumers may get a holiday present of some relief on food prices.”

In the meantime, the year-over-year inflation pace is still running at 8.5%. That’s just off the most aggressive rise in 40 years and a “worryingly high rate,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

At the center of worries about global growth is the Federal Reserve and concerns that its interest rate hikes aimed at controlling inflation will slow the economy so much that it will fall into recession.

Following Wednesday’s report, traders shifted their bets to expecting the Fed to hike just half a percentage point in September, rather than the previous trend toward 0.75 percentage points, a move that Rieder said could be mistaken.

“The persistence of still solid inflation data witnessed today, when combined with last week’s strong labor market data, and perhaps especially the still solid wage gains, places Fed policymakers firmly on the path toward continuation of aggressive tightening,” he wrote.

Food prices dropped significantly in July from the previous month, particularly the costs of wheat and vegetable oil, according to the latest figures from the United Nations’ Food and Agriculture Organization.

But the FAO said that while the drop in food prices “from very high levels” is “welcome,” there are doubts over whether the good news will last.

“Many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,” FAO chief economist Maximo Torero said in a press release.

The FAO food price index, which tracks the monthly change in the global prices of a basket of food commodities, fell 8.6% in July from the month before. In June, the index fell just 2.3% month on month.

However, the index in July was still 13.1% higher than July 2021.

Prices in the short term may fall further, if futures are anything to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.

For example, the wheat contracts closed at $775.75 per bushel on Friday, down from a 12-year high of $1,294 in March, and around the $758 price set in January.

Analysts cited a mix of both demand and supply reasons for the slide in food prices: Ukraine and Russia’s closely watched agreement to resume exports of grain through the Black Sea after months of blockade; better-than-expected crop harvests; a global economic slowdown; and the strong U.S. dollar.

Rob Vos, the director of markets, trade and institutions at the International Food Policy Research Institute, pointed to the news that the United States and Australia are set to deliver bumper wheat harvests this year, which will improve supply since shipment from Ukraine and Russia have been curtailed.

The higher U.S. dollar also lowers the price of staples, since commodities are priced in U.S. dollars, Vos said. Traders tend to ask for lower nominal dollar prices of commodities when the greenback is expensive.

The widely heralded U.N.-backed deal between Ukraine and Russia also helped to cool the market. Ukraine was the world’s sixth-biggest wheat exporter in 2021, accounting for 10% of global wheat market share, according to the United Nations.

The first shipment of Ukrainian grain — 26,000 tons of maize — since the invasion left the country’s southwestern port of Odesa last Monday.

Global skepticism over whether Russia will keep its end of the bargain hangs in the air.

Russia fired a missile onto Odesa just hours after the U.N.-brokered deal in late-July.

And freight and insurance companies may still think it’s too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any new shock can cause more price surges.

“To make a difference it will not be enough to get a few shipments out, but at least 30 or 40 per month to get the existing grains stored in Ukraine out, as well as the produce of the upcoming harvest,” said Vos.

“To help stabilize markets, the deal will need to hold in full also during the second half of the year since that is the period where Ukraine does most of its exports.”

Even with the existing agreement, arable Ukrainian land may continue to be destroyed “for as long as the war continues,” which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC’s “Street Signs Europe” last week.

“Once this [grain] corridor is over, we might see even more price increases going forward,” Mera said. Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves.

Then there is the pressure of exporting enough grain as quickly as possible from a war zone.

“It’s time that we’re working again. I don’t see us exporting two [to] five million tons per month out of these Black Sea ports,” John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.

“Hungry people, at the end of the day, get hungry very quickly after a week.”

In a note published earlier this month, credit rating agency Fitch Ratings’ analysts wrote that a possible increase in fertilizer prices, which fell recently — but which are still double that of 2020 — could cause grain prices to jump again.

Russia’s restriction of gas supply has led European natural gas prices to spike. Natural gas is a key ingredient in nitrogen-based fertilizers. La Nina weather patterns could disrupt grain harvests later this year as well, they added.

And the fall in food prices is not all good news. Part of the reason why staples have become cheaper is that traders and investors are pricing in recessionary fears, the analysts said.

The global manufacturing purchasing managers’ index has been in decline, while the U.S. Federal Reserve seems bent on raising interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Cereal prices, under which wheat falls, fell by 11.5% month on month, the FAO index showed. Prices of wheat specifically fell by 14.5%, partly because of the reaction to the Russia-Ukraine grain deal, and better harvests in the Northern Hemisphere, the FAO said.

Vegetable oil prices fell by 19.2% month on month — a 10-month low — in part because of ample palm oil exports from Indonesia, lower crude oil prices, and lack of demand for sunflower oil.

Sugar prices dipped by 3.8% to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback, and increased supply from Brazil and India.

Dairy and meat prices dropped by 2.5% and 0.5% respectively.

The consumer outlook for inflation decreased significantly in July amid a sharp drop in gas prices and a growing belief that the rapid surges in food and housing also would ebb in the future.

The New York Federal Reserve’s monthly Survey of Consumer Expectations showed that respondents expect inflation to run at a 6.2% pace over the next year and a 3.2% rate for the next three years.

While those numbers are still very high by historical standards, they mark a big drop-off from the respective 6.8% and 3.6% results from the June survey.

Through June, food prices rose 10.4% over the past year, according to the Bureau of Labor Statistics. They are still expected to climb 6.7% over the next 12 months, but that’s a decline from the June survey of 2.5 percentage points, the biggest fall in a data series going back to June 2013.

Likewise, respondents see gas prices, which rose 60% over the past year, increasing at just a 1.5% pace over the next year, a slide of 4.2 percentage points from June, the second-biggest monthly decline in the survey’s history.

The price of regular gas has come down about 67 cents a gallon over the past month though it remains 87 cents higher than a year ago, according to AAA. Commodity prices overall have been falling significantly as well.

Finally, home prices are expected to rise 3.5% from June’s 4.4%, the lowest projected gain since November 2020.

Five-year inflation expectations also slipped, dropping 0.5 percentage point to 2.3%.

The results come as the Fed has been raising interest rates aggressively to bring down inflation running at its highest level in more than 40 years. The central bank in 2022 has hiked benchmark rates four times for a total of 2.25 percentage points, and market pricing indicates a third consecutive 0.75 percentage point increase in September, according to CME Group data.

However, the New York Fed results from July might give policymakers reason to pull back if not in September then later in the year if the inflation data cooperates. The Fed targets inflation at 2% over the long run, so the projected levels in the survey remain well above the central bank’s comfort level.

Over the weekend, Fed Governor Michelle Bowman said she doesn’t expect inflation to come down anytime soon and sees a need to keep pushing rates higher. San Francisco Fed President Mary Daly echoed those sentiments, saying the increases are “far from done.”

Those comments came after the BLS on Friday reported much higher numbers for payroll growth — 528,000 — and wages, with average hourly earnings jumping 5.2%.

The New York Fed survey also showed that overall household spending growth for the next year is expected to cool to 6.9%. That’s also a comparatively high number over the longer run but well below the record-high 9% result from May. The 1.5 percentage point monthly decline is the largest in the survey’s history.

Consumers also grew slightly more optimistic on stock prices during a month that saw the S&P 500 soar 9%, with 34.3% now expecting higher prices over the next 12 months.