Most observers expected the Federal Reserve would finally cut its prime interest rate if inflation dropped closer to its 2% target.
We’re about to find out if they were right.
U.S. inflation eased further last month as year-over-year price increases reached a three-year low. That means the Fed may cut its rate after having raised it 11 times since early 2022.
The Labor Department said Wednesday consumer prices rose 2.5% in August from a year earlier, down from 2.9% in July. That’s the fifth straight drop and the smallest since February 2021. From July to August, prices rose just 0.2%.
Excluding volatile food and energy costs, so-called core prices rose 3.2% in August from a year ago, the same as in July, according to a report from The Associated Press. On a month-to-month basis, core prices rose 0.3%, a slight pickup from July’s 0.2% increase. Economists closely watch core prices, which typically provide a better read of future inflation trends.
“Today’s report will add to confidence within the Fed that inflation is indeed on a sustainable path towards 2%,” the Fed’s target level, Carl Weinberg, chief economist at High Frequency Economics, wrote in a note to clients, according to the AP.
For months, cooling inflation has provided gradual relief to America’s consumers, who were stung by the price surges that erupted three years ago, particularly for food, gas, rent and other necessities. Inflation peaked in mid-2022 at 9.1%, the highest rate in four decades.
And Americans’ paychecks have risen steadily for the past three years. Overall incomes have even outpaced inflation for roughly the past 18 months, helping more households handle elevated prices. On Tuesday, the Census Bureau reported that the median inflation-adjusted household income rose 4% last year to above $80,000, essentially matching the 2019 peak.
A key reason for last month’s drop in overall inflation was the third drop in gas prices in the past four months. Average gas prices fell 0.6% from July to August and are down 10.6% from a year ago, the AP reported. And used cars fell 1% last month. Measured from a year earlier, used car prices have tumbled 10.4%.
Grocery prices were unchanged from July to August, extending a cool-down in food costs even though they remain much higher than they were three years ago. Over the past year, grocery prices have ticked up just 0.9%, similar to the pace of pre-pandemic food inflation.
Fed officials have hinted that they’re increasingly confident that inflation is falling back to their 2% target and are now shifting their focus to supporting the job market, which is steadily cooling. As a result, they are poised to begin cutting their benchmark interest rate next week from its 23-year high in hopes of bolstering growth and hiring.
When the Fed meets Sept. 15, a modest quarter-point cut is widely expected.
A number of trends suggest that inflation will keep slowing, the AP reported. Those signs include a drop in oil prices to roughly $67 a barrel early Wednesday, down from a high of $80 last month.
Fed Chair Jerome Powell noted in an August speech that inflation was coming under control and suggested that the job market was unlikely to be a source of inflationary pressure.
