Annual US consumer inflation fell to 2.5% in August, a 3-year low

WASHINGTON (AP) — Inflation in the U.S. continued its post-pandemic decline last month, hitting a three-year low and paving the way for potential Federal Reserve interest rate cuts. This trend could influence the economic discourse as the presidential race nears its final weeks.

According to a Labor Department report released Wednesday, consumer prices rose 2.5% in August compared to a year earlier, down from 2.9% in July. This marks the fifth consecutive year-over-year decrease and is the lowest rate since February 2021. From July to August, prices increased by only 0.2%.

Core prices, which exclude the often-volatile food and energy sectors, rose 3.2% year-over-year in August, matching the July rate. On a monthly basis, core prices ticked up 0.3%, slightly higher than July's 0.2% increase. Core inflation is closely monitored by economists for a clearer picture of future inflation trends.

Carl Weinberg, chief economist at High Frequency Economics, noted that the report bolsters the Fed's confidence that inflation is on track to meet its 2% target.

The easing inflation has provided gradual relief for American consumers, who have faced price surges over the past three years, particularly for essentials like food, gas, and rent. Inflation peaked at 9.1% in mid-2022, the highest level in four decades.

During this period, wages have steadily increased, outpacing inflation for the last 18 months and helping households manage higher prices. On Tuesday, the Census Bureau reported that median inflation-adjusted household income rose 4% last year to over $80,000, nearly matching the 2019 peak.

The latest inflation figures come on the heels of a presidential debate where former President Donald Trump criticized Vice President Kamala Harris for the price increases that followed the Biden-Harris administration's entry into office, a period marked by global supply chain disruptions and shortages.

Trump incorrectly claimed during the debate that the inflation surge was the highest in U.S. history, despite the 1980 inflation rate reaching 14.6%, far exceeding the 2022 peak.

A key factor in the recent inflation drop was the third decrease in gas prices over the past four months, with average prices falling 0.6% from July to August and down 10.6% year-over-year. Used car prices also declined by 1% last month and are down 10.4% from a year ago.

Grocery prices remained steady from July to August, indicating a moderation in food costs, though they remain elevated compared to three years ago. Over the past year, grocery prices increased by just 0.9%, comparable to pre-pandemic inflation rates.

Despite the overall easing, many Americans are still adjusting their budgets. Kelsey Aubrey of North Palm Beach, Florida, reported that she shops at multiple stores to find the best prices, noting that her bills remain high and she works hard to manage them.

The uptick in core inflation from July to August was driven by higher housing costs and temporary increases in airfare and hotel room prices. Airline fares surged by 3.9% from July to August, reversing a previous decline, while hotel prices rose by 1.8% last month after previous drops.

Fed officials are closely watching housing costs and expect them to stabilize. According to Redfin, the median rent for new leases rose 0.9% in August to $1,645 a month. However, government data, which includes all rental costs, showed a 5.2% increase in rental prices over the past year.

Fed policymakers are increasingly confident that inflation is moving towards their 2% target and are expected to cut their benchmark interest rate next week from its 23-year high. A modest quarter-point reduction is anticipated, though core inflation data makes a larger cut less likely. The S&P 500 index fell about 1.6% in mid-morning trading following this expectation.

Over time, a series of Fed rate cuts should lower borrowing costs across the economy, including for mortgages, auto loans, and credit cards.

During the presidential campaign, Harris has proposed subsidies to help ease housing costs and supports a federal ban on price gouging for groceries. Trump has promised to increase energy production to combat inflation.

Several trends suggest ongoing moderation in inflation, including a drop in oil prices to about $67 a barrel from a high of $80 last month. Additionally, wage growth has slowed to an average of 3.5% annually, which helps reduce inflationary pressures. Fed Chair Jerome Powell recently highlighted that inflation is coming under control and that the job market is unlikely to contribute to inflationary pressures.