WASHINGTON (AP) — The post-pandemic surge in U.S. inflation continued to ease last month as year-over-year price increases hit a three-year low, paving the way for a rate cut by the Federal Reserve and likely to shape the economic policy debate in the final weeks of the presidential campaign.
Wednesdays report from the Labor Department showed that consumer prices rose 2.5% year-on-year in August, compared with 2.9% in July. It was the fifth consecutive annual decline 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 percent in August from a year earlier, the same as in July. On a monthly basis, core prices rose 0.3 percent, a slight acceleration from July’s 0.2 percent increase. Economists watch core prices closely because they tend to provide a better indication of future inflation trends.
“Today’s report will boost confidence within the Fed that inflation is indeed on a sustainable path toward 2%,” wrote Carl Weinberg, chief economist at High Frequency Economics, in a note to clients about the Fed’s target.
For months, the cooling of inflation has been providing gradual relief to American consumers after suffering from price increases three years ago, particularly for food, gasoline, rent and other essential goods. Inflation peaked at 9.1% in mid-2022, the highest rate in four decades.
And Americans’ wages have risen steadily over the past three years. Total incomes have even outpaced inflation over the past 18 months, helping more households cope with rising prices. On Tuesday, the Census Bureau announced reported that median inflation-adjusted household income rose 4% last year to over $80,000, essentially matching its 2019 peak.
Wednesday’s inflation numbers followed a presidential debate Tuesday night in which former President Donald Trump attacked Vice President Kamala Harris over price spikes that began several months after the Biden-Harris administration took office, when global supply chains stalled and severe shortages of parts and labor emerged.
During the debate, Trump mischaracterized the magnitude of the inflation rise when he claimed, “You may have had the highest inflation in the history of our country.” In 1980, inflation reached 14.6% – much higher than the peak in 2022.
A major reason for the drop in headline inflation last month was the third drop in gasoline prices in the last four months: Average gasoline prices fell 0.6 percent from July to August, down 10.6 percent from a year ago. And used car prices fell 1 percent last month. Compared to a year ago, used car prices are down 10.4 percent.
Food prices were unchanged from July to August, a continuation of the cooling in food costs, although they are still much higher than they were three years ago. Over the past year, food prices have risen by just 0.9%, similar to pre-pandemic food inflation.
Still, many Americans are trying to stretch their budgets. Kelsey Aubrey, who lives in North Palm Beach, Florida, and was shopping at discount supermarket Aldi on Tuesday, said she typically visits up to four or five stores in search of the cheapest groceries.
“We’re hopping from store to store, trying to save where we can,” she said. “Our bills are still pretty high. And we work a lot to pay the bills.”
The July-to-August rise in core inflation reflects an acceleration in housing costs and some price spikes in airline tickets and hotel rooms that are likely to prove temporary. Airfares alone rose 3.9 percent from July to August, after falling in the previous five months. Hotel room prices rose 1.8 percent last month, having fallen in two of the previous three months.
Fed officials, who closely monitor housing costs, expect them to continue to cool. The median rent for a new lease rose just 0.9 percent year over year in August, to $1,645 a month, according to real estate brokerage Redfin. But the government’s calculation takes into account all rents, including those of people who have lived in their apartments for years. It takes a while for the decline in new rents to be reflected in government data. Last month, rents rose 5.2 percent year over year, according to the government’s consumer price index.
Fed policymakers have signalled that they are increasingly confident that inflation will return to their 2% target and are now shifting their focus to supporting the labour market, constant coolingTherefore, in the hope of boosting growth and hiring, they are expected to begin cutting the benchmark interest rate from its 23-year high next week.
A modest cut of a quarter of a percentage point is widely expected. Given the rise in core inflation, it is unlikely that the Fed will consider cutting its benchmark interest rate by more than the usual half a percentage point next week, as some Wall Street traders had hoped. Share prices fell As a result, the broad S&P 500 index fell about 1.6 percent in morning trading.
Nevertheless, a series of Fed rate cuts should, over time, lower borrowing costs across the economy, including for mortgages, auto loans and credit cards.
During the presidential campaign, Harris suggested Subsidies for home buyers and developers to reduce housing costs. It also supports a federal Prohibition of price gouging for food. Trump has said he would increase energy production to reduce overall inflation.
Several trends suggest that inflation will continue to ease. Among those signs is the drop in oil prices to about $67 a barrel early Wednesday, down from $80 last month.
Americans’ wages are also rising more slowly — an average of about 3.5 percent a year, still a solid pace — which is easing inflationary pressures. Two years ago, wage growth was above 5 percent, a level that can force companies to raise prices sharply to cover their increased labor costs.
In a high-profile speech Last month, Fed Chairman Jerome Powell noted that inflation was under control and said inflationary pressures from the labor market were unlikely.
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Associated Press video journalist Cody Jackson contributed to this report from North Palm Beach, Florida.
