US Consumer Inflation Drops to 2.5% in August, Hitting 3-Year Low

Inflation in the United States has shown further signs of easing, according to the latest data from the Labor Department. The year-over-year price increase dropped to 2.5% in August, down from 2.9% in July, marking a significant reduction. This is the fifth consecutive month of declining inflation rates, with August recording the lowest level since February 2021. From July to August, consumer prices saw only a minor increase of 0.2%.

When food and energy costs are excluded, the so-called core prices also showed stability, remaining at a 3.2% rise from the previous year, consistent with July’s figure. Month-over-month, core prices climbed by 0.3%, indicating a slight acceleration compared to the 0.2% increase seen the previous month. Economists view core prices as a reliable indicator for predicting future inflation trends.

Carl Weinberg, chief economist at High Frequency Economics, commented that today’s report supports the Federal Reserve’s confidence in a sustainable return to their target inflation rate of 2%. As inflation gradually cools, it has been a relief for many consumers, who have been heavily impacted by price surges over the past three years, especially concerning essential items such as food and gas.

Inflation had reached a peak in mid-2022 at 9.1%, the highest it had been in four decades. However, Americans have seen some improvements in their paychecks. Median household income, adjusted for inflation, rose 4% last year, surpassing $80,000, which brings it in line with levels last seen in 2019. This trend has allowed consumers to manage the higher prices they face better.

In the context of this economic development, a recent presidential debate featured former President Donald Trump criticizing Vice President Kamala Harris concerning economic inflation since the Biden-Harris administration took office. Trump claimed that the current inflation surge is unprecedented, neglecting to mention that inflation reached 14.6% in 1980, a figure much higher than the recent peak.

One reason for the decline in overall inflation was the continued decrease in gas prices, which fell 0.6% from July to August and are down 10.6% year-over-year. Additionally, used car prices decreased by 1% in the last month and have dropped 10.4% compared to last year.

Food costs showed some stabilization as grocery prices remained unchanged from July to August, even as they continue to be elevated compared to three years ago. Over the past 12 months, grocery prices have increased only slightly by 0.9%, which aligns with pre-pandemic inflation rates in the food sector.

Despite these developments, many Americans still report struggling to manage their budgets. Kelsey Aubrey from North Palm Beach, Florida, shopping at a discount grocery store, highlighted the need to shop around to find the best prices. “We hop from store to store, trying to save where we can,” she noted, explaining that despite their efforts, bills remain high.

The uptick in core inflation from July to August was attributed to hikes in housing costs and temporary spikes in airfares and hotel room prices. Airline fares experienced a 3.9% increase from July to August after declining for five months, while hotel prices grew 1.8% during the same period.

Federal Reserve officials are closely monitoring housing costs and expect them to stabilize in a more consistent manner. According to real estate brokerage Redfin, new lease rents rose only 0.9% from last August, while the overall government measure indicated a larger increase of 5.2% due to long-term renter trends.

The Federal Reserve’s policymakers have indicated growing confidence in inflation returning to their 2% target. They are now redirecting their attention toward supporting the job market, which is beginning to cool. As such, the Fed is poised to implement a cut in the benchmark interest rate next week. The anticipated modest quarter-point cut is seen as a way to encourage growth and increase hiring, but the recent core inflation rise suggests that more significant cuts may not be on the horizon.

During the presidential campaign, both Harris and Trump have proposed different plans aimed at addressing inflation and housing costs, with Harris advocating for subsidies for home buyers and builders while Trump emphasizes boosting energy production as a strategy to lower overall inflation rates.

Current trends indicate a likelihood of continued deceleration in inflation, including a drop in oil prices, which reached about $67 a barrel, down from a high of $80 last month. Although paycheck growth has slowed to an average of about 3.5% annually, this is still sufficient to alleviate some of the inflationary pressures. Fed Chair Jerome Powell recently noted that inflation is coming under control, highlighting that the job market does not appear to be creating additional inflation risks.

Source: AP