Live Updates: Inflation Remains Subdued, as Fed Preps Rate Cut
U.S. inflation slowed to 2.5 percent in the year through August, the final major economic puzzle piece before the Federal Reserve’s meeting next week.
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The Consumer Price Index climbed 2.5 percent in August from a year earlier, a notably cooler pace of inflation than July’s 2.9 percent and down sharply from a peak of 9.1 percent back in 2022.
Federal Reserve officials are widely expected to make their first interest rate cut in more than four years next week, and the fresh inflation reading — which was the coolest in more than three years — is the final major economic puzzle piece before that move.
The report offered the latest evidence that inflation is coming under control after surging in 2021 and 2022. Given that, it should allow the Fed to turn a corner after two years of using higher interest rates to fight back against rapid price increases.
Investors widely expect that Fed officials will cut interest rates at the conclusion of their policy meeting next Tuesday and Wednesday. They have been betting that officials will most likely lower borrowing costs by a quarter of a percentage point from their current 5.33 percent, but a larger half-point move is also seen as possible.
Here’s what else to know:
Underlying inflation trends: Stripped of food and fuel prices — which are volatile from month to month — the “core” inflation measure in August was 3.2 percent, in line with economist forecasts.
Cool monthly numbers. Overall inflation was mild on a monthly basis, but it was slightly quicker after cutting out food and fuel. That “core” monthly measure ticked up to 0.3 percent, which was hotter than expected.
Housing in focus. That tick-up came as a closely watched housing measure, which tracks how much it would cost to rent owned housing, moved up. Economists will likely keep a close eye on that, because it has been expected to slow. Stubbornness there could make it harder to fully stamp out inflation.
The Fed’s calculus: Raising interest rates is like tapping the brakes on the economy. As economic activity slows thanks to higher borrowing costs, demand falls, making it more difficult for businesses to raise prices. Now, Fed officials want to make sure that they don’t overdo it. Keeping rates too high for too long could push up unemployment and risk a recession.
Sizing up a rate cut: The immediate question is how big September’s rate cut will be. Fed officials don’t want to cut too much too quickly if there is a chance that price increases are not fully under control, but they also don’t want to drag their feet and risk the labor market when inflation has been quashed.
What comes next? In the long run, what is likely to be even more consequential than how much the Fed cuts in September is how quickly they move in the months after that. We’ll get a snapshot of their plans next week, when they release fresh quarterly economic forecasts. Those will outline a rough path ahead for rates. Inflation continued to cool on an annual basis in August, good news for Federal Reserve officials ahead of their meeting next week, at which they are widely expected to make their first interest rate cut in more than four years.
The politics of inflation. As price increases return to normal, consumers are beginning to feel like they are catching up. Wage growth has been faster than price increases for more than a year now by several measures. That is good news for the Biden administration, which has struggled to take credit for its economic wins — including a solid job market — as rising prices undermined consumer confidence.
U.S. government bond yields rose on the heels of the report, with both the 2-year and 10-year Treasury inching higher. It’s a sign of investors girding for rates to remain elevated for longer, since month-over-month “core” inflation didn’t slow by as much as expected.
“This isn’t the CPI report the market wanted to see,” said Seema Shah, chief global strategist at Principal Asset Management.
Food price gains continued to ease in August, providing some relief for consumers at the grocery store.
Overall, food prices climbed 0.1 percent over the month, a slightly slower rate than July, when prices rose 0.2 percent. Grocery prices were flat after they rose 0.1 percent the month before. The cost of dining out rose 0.3 percent over the month, slightly up from 0.2 percent in July.
Compared with a year earlier, food inflation also cooled. Food prices were up 2.1 percent in the year through August, down from 2.2 percent in July. The annual rate has, for the most part, been steadily easing since reaching a peak of 11.4 percent in August 2022.
Prices for fruits and vegetables fell 0.2 percent over the month after they rose 0.8 percent in July. Meats, poultry and fish prices rose 0.5 percent after they climbed 0.3 percent the month before. Prices for cereals and bakery products fell 0.1 percent.
Egg prices increased again after several months of relatively strong price gains. In August, egg prices rose 4.8 percent over the month, a slightly slower rate compared with July, when they climbed 5.5 percent. Egg prices have been up and down since an outbreak of bird flu contributed to a spike in prices early last year. Compared with a year ago, egg prices are up 28.1 percent.
Although food inflation has eased, many consumers remain frustrated over high grocery costs, which has been a persistent issue for the Biden administration. The surge in food costs has been a top issue among voters ahead of the presidential election.
Still, some consumers said they had noticed more moderate price increases at the grocery store in recent months. “I’m not seeing stuff go up as much,” said Nicole Jesse, 62, a co-owner of La Casa Pizzaria in Omaha, Neb. “I’m hopeful that maybe we won’t see prices continue to increase like they did.”
Ms. Jesse said she had also experienced some relief with her business expenses as costs for ingredients like cheese and ground beef had started to stabilize over the past year. Still, she said she would most likely have to increase her restaurant’s menu prices by about 5 percent in the next few weeks to help offset higher labor, packaging and utility costs.
Compared with a year earlier, the cost of dining out was up 4 percent in August, slightly down from 4.1 percent in July.
“I’m really less concerned about overall food costs at this point,” Ms. Jesse said. “It’s more or less now just keeping up with things like wages.”
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SKIP ADVERTISEMENTThe stubbornness in the monthly core inflation measure probably shores up the argument for a quarter point rate cut in September, rather than a bigger half-point move. Investors were already betting that a smaller move was more likely.
For the Fed, the tick up in monthly “core” inflation could be in focus here, especially because it came on the back of those stubborn housing costs. This doesn’t change the narrative — inflation is still cooling — but it is a cautionary note in the report.
The moderate headline growth number is better for the Biden administration, particularly for Vice President Kamala Harris, than a reacceleration of inflation. But the stronger-than-expected core rate may provide ammunition for Republicans, especially given that it was primarily driven by stubborn housing costs.
This report showed that food inflation continued to ease last month. That’s welcome news for consumers – and for the executives in the snack industry who have increasingly been noting that their customers are fed up with higher prices. The chief executive of Mondelez, the maker of Oreo and Ritz crackers, said on a recent earnings call that consumers “are frustrated with inflation, but they’re optimistic about the future.”
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“Core” inflation came in a bit hotter than expected, largely because of a pickup in housing costs. Housing has been a particularly stubborn inflation category, even as other prices have moderated.
Stocks nudged lower after the numbers were released and it seems this may be the reason why. Futures on the S&P 500 are down around 0.4 percent.
Housing costs accounted for more than 70 percent of the year-over-year increase in core prices.
Food inflation continued to ease in August. Overall, food prices climbed 0.1 percent over the month, slightly down from 0.2 percent in July. Grocery prices were flat over the month after they rose 0.1 percent in July.
The report is out! Consumer prices rose 0.2 percent in August and were up 2.5 percent from a year earlier. “Core” prices, excluding food and energy, were up 0.3 percent from July and 3.2 percent from a year ago.
The 2.5 percent year-over-year inflation reading is the lowest since March 2021.
Prices still remains top of mind for American voters on the morning after a contentious debate, in which former President Donald Trump struggled to stick to his message tying Kamala Harris to rising costs.
“I had no inflation, virtually no inflation, they had the highest inflation, perhaps in the history of our country because I’ve never seen a worse period of time,” Trump said. “People can’t go out and buy cereal bacon or eggs or anything else.”
(Inflation was much higher in the early 1980s.)
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SKIP ADVERTISEMENTWith about 10 minutes until the report, stock futures on the S&P 500 and Nasdaq, which let investors buy and sell before the official start of trading, are slightly lower. The dip comes after the S&P 500 rose almost 0.5 percent yesterday. Futures for the Russell 2000, an index of smaller companies more closely tied to the ebb and flow of the economy, are also down a bit.
On the other side of the Atlantic, tomorrow the European Central Bank is widely expected to announce another quarter-point interest rate cut, amid slowing inflation and weak economic growth in the eurozone.
E.C.B. policymakers are still wary about services inflation, which accelerated last month, and have been taking a slow and cautious approach. Thursday’s expected cut would come three months after the first reduction in rates, and traders aren’t expecting another cut until December.
Inflation reports are becoming increasingly boring, which is great news for the Fed (and the American shopper). After three years in which these reports regularly surprised analysts, price increases have begun to come in at a relatively moderate pace with each passing report. That’s what economists are expecting today.
The cost of gasoline and diesel has been falling in the United States, welcome news for efforts to reduce inflation.
A gallon of regular gasoline in August cost an average of $3.39, down nearly 12 percent from a year earlier, according to the Energy Information Administration. Diesel prices fell even further — around 15 percent year-over-year — to $3.70 a gallon last month. Prices have continued sliding in September, and the average price of regular gasoline on Tuesday was $3.26 gallon, according to the AAA motor club.
Those declines partly reflect sliding oil prices. Americans also have been using less gasoline and diesel this year than they did last year, federal data show.
“The American commute is just not what it was, and I don’t know if it’ll ever get back there,” said Patrick De Haan, the head of petroleum analysis at GasBuddy, a company that tracks fuel prices.
U.S. oil prices, which were a touch below $75 a barrel at the end of August, have tumbled further in the past 10 days, sagging to around $66 a barrel on Tuesday amid concerns the world may soon have more crude than it needs. Oil now costs roughly half what it did in late spring 2022, after Russia invaded Ukraine.
Markets have grown particularly jittery about weakening oil demand in China and robust supply from producers in the United States and elsewhere. Last week, as prices were falling, the Organization of the Petroleum Exporting Countries, the oil cartel, agreed to delay plans to increase production until at least December.
But the move does not appear to have had the intended effect, and prices have continued to fall.
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