The Federal Reserve's preferred inflation measure on Friday indicated that price pressures are easing, a trend likely to prompt further interest rate cuts this year and next. The Commerce Department reported that prices rose just 0.1% from July to August, down from a 0.2% increase the previous month. Year-over-year, inflation fell to 2.2%, down from 2.5% in July and just above the Fed's 2% target. This cooling of inflation may be diminishing former President Donald Trump's polling advantage on the economy. A recent survey by The Associated Press-NORC Center for Public Affairs Research showed respondents nearly evenly split on whether Trump or Vice President Kamala Harris would better manage the economy—a notable shift from when President Joe Biden was in the race, with about six in ten Americans disapproving of his economic handling. This suggests Harris might be distancing herself from Biden's economic baggage as consumer sentiment improves.
Grocery costs barely increased last month, and energy costs dropped by 0.8%, driven by cheaper gasoline. Excluding volatile food and energy prices, core prices rose just 0.1% from July to August, also down from the previous month's 0.2% increase—marking the fourth consecutive month of sub-2% annualized price increases, aligning with the Fed's target. Compared to a year earlier, core prices rose by 2.7% in August, slightly higher than in July.
"Sticky inflation is yesterday’s problem," stated Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
With inflation dropping significantly from its 2022 peak to just above the Fed's target, the central bank recently cut its benchmark interest rate by an unusually large half-point—a dramatic shift after over two years of high rates. Policymakers also signaled expectations for an additional half-point rate cut in both November and December and foresee four more cuts in 2025 and two in 2026.
The ongoing decline in inflation makes further reductions in the Fed's key benchmark rate increasingly likely in the coming months.
On Thursday, Tom Barkin, president of the Federal Reserve Bank of Richmond, advocated for a cautious approach to reducing interest rates. In an interview with The Associated Press, Barkin expressed support for a modest reduction in the Fed's key rate but emphasized the need to ensure that inflation continues to decline before lowering the benchmark rate to a level that would no longer constrain economic growth.
Friday's report revealed that Americans' incomes and spending increased slightly last month, both rising by just 0.2%. However, these modest gains coincided with upward revisions for income and spending figures from the previous year, indicating that consumers were in better financial shape than previously thought. Additionally, recent revisions showed that Americans have been saving more of their incomes in recent months, with the savings rate reaching 4.8% in September compared to earlier figures showing it had fallen below 3%.
The government reported on Thursday that the economy grew at a robust 3% annual rate in the April-June quarter. It also revised its estimates upward for economic growth from 2018 through 2023. The Federal Reserve prefers using the personal consumption expenditures (PCE) price index over the consumer price index (CPI) as an inflation gauge because it accounts for changes in consumer behavior when prices rise. For example, it captures when consumers switch from more expensive national brands to cheaper store brands. Generally, the PCE index shows a lower inflation rate than CPI partly because rents have a smaller weight in PCE.
Recent data suggests that the economy continues to expand healthily. On Thursday, the government confirmed its previous estimate of a 3% annual growth rate from April through June, driven by strong consumer spending and business investment. Several economic indicators have also been positive: last week saw unemployment benefit applications drop to their lowest level in four months; retail spending increased last month; industrial production rebounded; single-family home construction surged compared to last year; and consumer sentiment improved for three consecutive months according to preliminary figures from the University of Michigan. This improved outlook was attributed to "more favorable prices as perceived by consumers" for durable goods such as cars, appliances, and furniture.
reference: Associated Press.
