Inflation continued to decline in August, suggesting that the rapidly rising prices that have plagued the U.S. economy for nearly three years during the pandemic are increasingly fading into the background.

Inflationary pressures are easing overall, said Sarah House, senior economist at Wells Fargo Economics.

The consumer price index, which measures how quickly prices are changing across the U.S. economy, rose 2.5 percent in August from a year earlier, the U.S. Labor Department said Wednesday.

This figure is down from 2.9% in July and is the lowest since February 2021.

However, there are still some areas of concern, with the housing market arguably the most worrying, economists said. However, prices of basic foodstuffs and gasoline have normalized and the inflation trend appears to be clearly pointing downward, they said.

“We expect inflation to continue to decline,” but there will be “some fluctuations” in the data from month to month, House said.

The inflation rate for August is well below the peak of 9.1 percent during the pandemic in mid-2022, the highest level since 1981.

It is also approaching policymakers’ long-term target of around 2%.

“Overall, inflation appears to have been brought under control. However, with housing inflation continuing to refuse to abate as quickly as hoped, it is not yet completely defeated,” wrote Paul Ashworth, chief North American economist at Capital Economics, in a note on Wednesday morning.

Against this backdrop, the US Federal Reserve is expected to begin cutting interest rates later this month as its focus shifts from fighting inflation to averting a recession amid a slowing labour market.

During the pandemic, the central bank raised interest rates to their highest levels in 23 years, driving up borrowing costs for consumers and businesses in an effort to curb inflation.

Both House and Ashworth expect the Fed to cut interest rates by a quarter of a percentage point at its next meeting next week.

As the U.S. economy reopened in 2021, inflation for physical goods skyrocketed.

The Covid-19 pandemic disrupted supply chains while Americans spent more on their homes and less on services like dining out and entertainment. Supply shortages coincided with higher consumer demand.

Inflation in the services sector – which is generally more sensitive to labor costs – also jumped, partly due to a historically hot labor market as employers desperately sought workers after the economy reopened, economists said.

More from Personal Finance:
The “Vibecession” comes to an end as the US economy makes a soft landing
US labor market slows down, but no “three-alarm fire” yet
Relocating retirees want lower living costs and a better lifestyle

The housing sector, which falls under the services category, is a major obstacle to a decline in overall inflation to the Fed’s target level, economists said.

Accommodation costs represent the largest component of the consumer price index and therefore have a disproportionate impact on inflation figures.

The housing index has risen 5.2% since August 2023, accounting for more than 70% of the annual increase in the “core” CPI, the Bureau of Labor Statistics (BLS) said Wednesday. The core CPI is economists’ preferred indicator of inflation trends; it excludes food and energy costs, which can be volatile.

Inflation in the housing market is moving at a snail’s pace due to government measurement methods, economists said.

Such data deficiencies obscure positive news in the real-time rental market, which has seen minimal inflation for about two years, economists say. According to the BLS New Tenant Rent Index, average rents actually fell 1% year over year in the second quarter of 2024, meaning prices have actually fallen.

However, consumer price inflation for housing has recently seemed to defy gravity, rising monthly for two months in a row, from 0.2% in June to 0.4% in July and then to 0.5% in August.

“It’s puzzling, frankly,” House said. “(But) I do believe that given the general trends in the rental market, we’re going to see a continued slowdown in the search for housing.”

In a broader sense, there are other categories of “notable According to the BLS, “price increases” over the past year include auto insurance, where prices will rise 16.5% starting in August 2023, medical care by 3%, recreation by 1.6% and education by 3.1%.

A steep rise in new and used car prices a few years ago is now likely to lead to high inflation in car insurance premiums and vehicle repairs, as more expensive cars generally cost more to insure and repair, economists say.

Insurance inflation should eventually ease as auto prices fall, they said. Prices for new cars have fallen about 1% in the past year, and those for used cars and trucks have fallen more than 10%.

Egg prices – which rose sharply in 2022 due to a historic outbreak of bird flu – are rising again following the resurgence of the deadly disease, up 28% from last year.

Annual headline food inflation was less than 1% in August, compared with an average of 11.4% in 2022, the highest since 1979.

Gasoline prices also fell by about 10% last year.