US inflation reaches a 3-year low as Federal Reserve prepares to cut interest rates
WASHINGTON — The post-pandemic spike in U.S. inflation eased further last month as year-over-year price increases reached a three-year low, clearing the way for the Federal Reserve to cut interest rates and likely shaping the economic debate in the final weeks of the presidential race.
Wednesday’s report from the Labor Department showed that consumer prices rose 2.5 percent in August from a year earlier, down from 2.9 percent in July. It was the fifth straight annual drop and the smallest rate since February 2021. From July to August, prices rose just 0.2 percent.
Excluding volatile food and energy costs, so-called core prices rose 3.2 percent in August from a year ago, the same as in July. On a month-to-month basis, core prices rose 0.3 percent, a slight pickup from July’s 0.2 percent 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 percent,” the Fed’s target level, Carl Weinberg, chief economist at High Frequency Economics, wrote in a note to clients.
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 percent, 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 percent 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. 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.
Still, many Americans are taking steps to try to stretch their budgets. Kelsey Aubrey, who lives in North Palm Beach, Fla., and was shopping at the discount grocer Aldi on Tuesday, said she typically visits up to four or five stores in her search for the lowest grocery prices.
“We hop from store to store, trying to save where we can,” she said. “Our bills are still pretty high. And we’re working a ton to pay the bills.”
The Fed’s policymakers have signaled that they’re increasingly confident that inflation is falling back to their 2 percent 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.
A number of trends suggest that inflation will keep slowing. Those signs include a drop in oil prices to roughly $67 a barrel early Wednesday, down from a high of $80 last month.
Americans’ paychecks are also growing more slowly — an average of about 3.5 percent annually, still a solid pace — which reduces inflationary pressures. Two years ago, wage growth was topping 5 percet, a level that can force businesses to sharply raise prices to cover their higher labor costs.
In a high-profile speech last month, Fed Chair Jerome Powell noted that inflation was coming under control and suggested that the job market was unlikely to be a source of inflationary pressure.