The post-pandemic spike in U.S. inflation continued to ease last month as annual price increases hit a three-year low, paving the way for the Federal Reserve to cut interest rates next week.
Wednesday report from the Ministry of Labor showed that consumer prices rose by 2.5% in August compared to a year earlier. It was the fifth consecutive annual decline and the smallest increase since February 2021. From July to August, prices rose by just 0.2%.
Excluding volatile food and energy costs, so-called core prices rose 3.2% in August compared to 12 months earlier, the same as in July. On a monthly basis, core prices rose 0.3% last month, an improvement from the 0.2% increase in July. Economists keep a close eye on core prices, which tend to provide a better picture of future inflation trends.
For months, falling inflation has provided gradual relief for U.S. consumers, who have been plagued by the price hikes that erupted three years ago, especially for food, gas, rent and other necessities. Inflation peaked at 9.1% in mid-2022, the highest rate in forty years.
Fed officials have indicated that they are increasingly confident that inflation will return to their 2% target and are now shifting their focus to supporting the labor market, which cool steadily. As a result, policymakers are poised to cut key interest rates from a 23-year high in hopes of boosting growth and job creation.
A modest quarter-point reduction is widely expected next week. Over time, a series of interest rate cuts should lower the cost of borrowing across the economy, including on mortgages, car loans and credit cards.
The latest inflation data could inject itself into the final weeks of the presidential race. Former President Donald Trump has blamed Vice President Kamala Harris for the rise in inflation, which erupted in early 2021 as global supply chains stalled and caused severe shortages of parts and labor. Harris suggested subsidies for home buyers and builders in an effort to lower housing costs and supports a federal government prohibition of price gouging for groceries. Trump has said he would boost energy production to reduce overall inflation.
A big reason why inflation eased again in August was that gas prices fell about 10 cents per gallon last month to a national average of about $3.29, according to the Energy Inflation Administration.
Economists also expect government action on food prices and rents to rise more slowly. Although food prices are about 20% more expensive than before the pandemic, they have barely increased over the past year.
Another potential cause of slower inflation is that the cost of new apartments has started to fall as a stream of new apartment construction has been completed.
According to real estate brokerage Redfin, the average rent for a new lease rose just 0.9% in August from a year earlier, to $1,645 per month. But the government measure includes all rents, including those of people who have lived in their apartment for months or years. It will take some time before the slowdown in new rents becomes visible in the government figures. According to the government’s consumer price index, rental costs rose 5.1% in July from a year ago.
Americans’ wages are also growing more slowly – an average of about 3.5% per year, still a solid pace – reducing inflationary pressures. Two years ago, wage growth exceeded 5%, a level that could force companies to raise prices sharply to cover their higher labor costs.
In one controversial speech Last month, Fed Chairman Jerome Powell noted that inflation was starting to come under control and suggested the labor market is unlikely to be a source of inflationary pressure.
Consumers have driven the economy over the past three years. But they are increasingly turning to debt to keep up with spending and credit cards, and car delinquencies are rising, raising concerns that they may soon have to curb their spending. Lower consumer spending could lead more employers to freeze hiring or even cut jobs.
