Inflation in the United States has reached a three-year low in August, indicating a decline in the rate of price increases to pre-pandemic levels. This development paves the way for the Federal Reserve to potentially start reducing its key interest rate next week. Economists estimate that year-over-year inflation slowed to 2.6% last month, the lowest rate since March 2021. Core inflation, excluding volatile food and energy prices, is believed to have remained steady at 3.2%.
The peak inflation rate of 9.1% in June 2022, the highest in four decades, led to the Federal Reserve implementing 11 rate hikes in 2022 and 2023. The Fed's actions raised its key rate to a 23-year high, making loans more expensive across the economy.
The latest inflation figures could impact the ongoing presidential race, with former President Donald Trump attributing the inflation surge to Vice President Kamala Harris. Harris has proposed measures such as subsidies for home buyers and builders to alleviate housing costs and supports a federal ban on price-gouging for groceries. Trump, on the other hand, advocates for increased energy production to combat inflation.
Fed officials have expressed confidence that inflation is gradually returning to their 2% target, shifting their focus to supporting the cooling job market. The Fed aims to achieve stable prices and maximum employment through its policies.
The anticipated reduction in the Fed's benchmark rate is expected to lower the cost of consumer and business borrowing, including mortgages, auto loans, and credit cards. Fed Governor Christopher Waller highlighted significant progress towards the inflation goal, with annual inflation for over half of tracked goods and services falling below 2.5%.
Factors contributing to the expected decrease in inflation include a decline in gas prices by about 10 cents per gallon in August, as well as slower increases in grocery prices and rents. Wage growth has also moderated, reducing inflationary pressures compared to two years ago.
Fed Chair Jerome Powell has indicated that inflation is stabilizing, and the job market is unlikely to drive inflationary pressures. As a result, the Fed is poised to begin reducing its key rate to stimulate growth and hiring. However, concerns about rising consumer debt and potential spending cutbacks leading to job losses remain.
The Fed is anticipated to announce a modest quarter-point rate cut next week, with the possibility of a half-point reduction. Market expectations suggest a half-point rate cut at the Fed's November meeting based on futures prices.
