US Inflation Hits 3-Year Low as Fed Plans to Cut Interest Rates

Inflation in the United States has continued to decline, with recent data showing year-over-year price increases reaching a three-year low. This easing of inflation opens the door for the Federal Reserve to consider cutting interest rates in the coming days, which could further stimulate economic growth.

The Labor Department’s report released Wednesday revealed that consumer prices increased by 2.5% in August compared to the same month last year. This reflects a decrease from a 2.9% rise in July and marks the fifth consecutive annual decline in inflation, the lowest increase since February 2021. Monthly, prices rose just 0.2% from July to August, indicating a period of stable prices.

When excluding the more volatile categories of food and energy, core prices maintained a 3.2% increase in August from the previous year, the same as July. However, on a month-to-month basis, core prices edged up 0.3%, which is a slight increase from July’s 0.2%. Economists pay close attention to core prices as they typically offer a clearer picture of future inflation trends.

The gradual cooling of inflation has brought relief to American consumers who felt the impact of price surges over the past three years, particularly in essentials like food, fuel, and rent. Inflation reached a peak of 9.1% in mid-2022, marking the highest level seen in four decades.

A significant factor contributing to last month’s decline in overall inflation was the ongoing decrease in gas prices, which have fallen for three of the past four months. Average gas prices decreased by 0.6% from July to August and have dropped 10.6% year-over-year. Additionally, used car prices saw a decline of 1% last month, with year-over-year prices down by 10.4%.

Meanwhile, grocery prices remained unchanged from July to August, continuing a trend of cooling food costs. Nonetheless, grocery prices are still considerably higher than they were three years ago, reflecting a modest yearly increase of just 0.9%, similar to pre-pandemic rates of food inflation.

Federal Reserve officials are increasingly optimistic that inflation is returning to their target of 2%. They are now pivoting their focus towards strengthening the job market, which is showing signs of cooling down. As a result, Fed policymakers are expected to initiate a reduction in their benchmark interest rates, which are currently at a 23-year high, in hopes of fostering growth and encouraging hiring.

A quarter-point cut is broadly anticipated in the next meeting. Over time, this series of rate cuts is likely to lower borrowing costs across various segments of the economy, including mortgages, auto loans, and credit cards.

The latest inflation figures could also play a prominent role in the upcoming presidential race. Former President Donald Trump has attributed the rise in inflation to Vice President Kamala Harris, linking it to the supply chain disruptions experienced in early 2021 that caused significant shortages in parts and labor. Harris has put forward proposals for subsidies aimed at easing housing expenses and supports a federal ban on price-gouging for groceries. In contrast, Trump has suggested increasing energy production as a means to combat rising inflation.

Despite the general optimism about inflation, the cost of rents and housing has continued to rise, contributing to a slight increase in core inflation. The Federal Reserve is monitoring housing costs closely and anticipates that there will be more consistent cooling in this area in the months ahead.

According to Redfin, a real estate brokerage, the median rent for new leases rose only 0.9% in August compared to a year earlier, reaching $1,645 monthly. However, it’s important to note that government measurements of rents incorporate all rentals, including older agreements, which may delay the reflection of new rent trends in the data. The government reported a higher rental cost increase of 5.2% year-over-year, based on the consumer price index.

Wage growth in America has also seen a slowdown, averaging around 3.5% annually, which contributes to less inflationary pressure. This figure was over 5% two years earlier, a level that typically forces businesses to raise prices significantly to accommodate higher labor costs.

In a notable speech last month, Federal Reserve Chair Jerome Powell indicated that inflation appears to be stabilizing, suggesting the job market is not a likely cause of future inflationary pressures.

Consumers, who have been the backbone of the economy for the past three years, are increasingly depending on debt to sustain their spending habits. However, growing delinquencies in credit card and auto loans raise concerns that consumers may soon need to scale back their expenditures. A reduction in consumer spending could influence employers to halt hiring or potentially lead to layoffs.