Inflation Eases in August, Reaching a Three-year Low

The U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) rose 2.5% year over year in August, down from 2.9% in July. This is the fifth straight annual drop and the smallest the CPI has been since February 2021, signaling that the Federal Reserve (Fed) may start cutting interest rates.

The “core” CPI, which strips out the unpredictable food and energy components, increased 0.3% in August from July and 3.2% annually. While the annual increase matched the 3.2% projections, the core CPI was slightly higher than projections of 0.2%. Inflation slowly moderated, but housing-related costs remain an issue; shelter costs rose 0.5%, marking the second month of acceleration.

A key driver for August’s drop in overall inflation was the third cut in gas prices in the past four months. Average gas prices fell 0.6% from July to August and are down 10.6% from a year ago. Used car prices also declined 1% last month and dropped 10.4% from a year earlier.

“Although inflation has eased, it does not mean that the prices of things that people buy have actually fallen. It just means that prices are not increasing as fast.”

_{Lisa Sturtevant, chief economist at Bright MLS}

Lately, the Fed’s attention has turned to a slowing labor market. Workers’ paychecks have been steadily rising for the past three years to handle elevated prices, and job creation has been slowing since the spring. The unemployment rate fell to 4.2% in August from 4.3% in July, driven by a reversal of temporary layoffs. The real average hourly earnings rose 0.2% in August, outpacing the monthly CPI increase.

What’s Next?

Inflation readings have slowly been moving toward the Fed’s 2% target. With the latest reading dropping to the lowest level in more than three years, many economists expect that the Fed will soon cut interest rates for the first time since the beginning of the COVID-19 pandemic. However, officials haven’t yet committed to a specific timetable and have not speculated how quickly cuts might occur.

Inflation continues to apply financial pressures on most U.S. households. In fact, CNBC reports that prices are about 20% higher than they were pre-pandemic. Individuals should continue to monitor the economy and associated inflation trends, adjusting their financial habits accordingly. Employees should check with their managers for financial and mental wellness benefits and related resources.

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