The post-pandemic surge in U.S. inflation further eased last month with year-on-year price growth hitting its lowest level in three years, paving the way for the Federal Reserve to cut interest rates next week.
Consumer prices rose 2.5% year-on-year in August, slowing from a 2.9% increase in July, the Labor Department said in a report released Wednesday, marking the fifth consecutive decline and the smallest increase since February 2021. Prices rose just 0.2% from July to August.
So-called core prices, which exclude volatile food and energy costs, rose 3.2% in August from a year earlier, the same as in July. Month-on-month, core prices rose 0.3% last month, up slightly from a 0.2% increase in July. Economists watch core prices closely, as they usually provide a more accurate read on future inflation trends.
American consumers, who were hit by price hikes that erupted three years ago, especially for food, gasoline, rent and other basic goods, have been gradually relieved over the months by a slowdown in inflation, which peaked at 9.1% in mid-2022, the highest rate in four decades.
The main reason for the overall drop in inflation last month was a drop in gasoline prices, the third in the past four months. Average gasoline prices fell 0.6% from July to August and are down 10.6% year-over-year. Used car prices fell 1% last month. Compared to a year ago, used car prices are down 10.4%.
Food prices were unchanged from July to August, continuing the slump in food prices even though they are still higher than they were three years ago. Food prices have risen just 0.9% over the past year, similar to the pace of food inflation before the pandemic.
Federal Reserve officials are growing more confident that inflation has fallen to its 2% target, signaling they are shifting their focus to supporting a steadily weakening labor market. As a result, policymakers are poised to start cutting benchmark interest rates from their 23-year high in the hopes of spurring growth and hiring.
A smaller quarter-point cut is widely expected next week, a series of rate cuts that should lower borrowing costs across the economy, including for mortgages, auto loans and credit cards, over the long term.
The latest inflation figures could have an impact on the presidential election in the final weeks. Former President Trump has heaped blame on Vice President Kamala Harris for the inflation surge that tightened global supply chains in early 2021, causing severe shortages of parts and labor. Harris has proposed subsidies for homebuyers and builders to help ease housing costs and supports a federal ban on food price hikes. President Trump has said he would increase energy production to curb overall inflation.
Still, rents and home prices rose faster in July and August than in the previous month, a key factor driving core inflation higher. Fed officials who watch housing costs closely expect them to cool more consistently in coming months.
The median rent for new rentals rose just 0.9% in August from a year earlier to $1,645 a month, according to real estate brokerage Redfin. But the government measure includes all rents, including those of people who have been living in apartments for months or years. The slump in new rents will take time to show up in government data. Rents rose 5.2% last month from a year ago, according to the government’s Consumer Price Index.
American wage growth has also slowed, remaining at a still-stable average annual rate of about 3.5%, reducing inflationary pressures. Two years ago, wage growth was more than 5%, a level that forced companies to raise prices sharply to cover rising labor costs.
In a highly-anticipated speech last month, Fed Chairman Jerome Powell said inflation was being contained and suggested the labor market was unlikely to be a source of inflationary pressure.
Consumers have driven the economy for the past three years. But as more people go into debt to keep up with spending, and auto delinquencies are rising, there are growing concerns that spending may have to be curbed soon. The decline in consumer spending could lead more employers to impose hiring freezes or cut staff.
Rugaber is a contributor to The Associated Press.
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