Inflation in the U.S. eased further last month, with year-over-year price increases reaching a three-year low. Consumer prices rose 2.5% in August from a year earlier, down from 2.9% in July. Core prices, excluding food and energy costs, rose 3.2% from last year. Economists believe inflation is on a sustainable path towards the Fed’s target level of 2%, which is expected to influence the economic debate in the final weeks of the presidential race.
The cooling inflation trend has provided relief to American consumers, who faced price surges three years ago, particularly in essentials like food and gas. Inflation peaked at 9.1% in mid-2022, the highest rate in four decades. Household incomes have been rising steadily, outpacing inflation for the past 18 months. The median inflation-adjusted household income rose 4% last year to over $80,000, matching the 2019 peak. This has helped more families cope with elevated prices.
Former President Donald Trump criticized Vice President Kamala Harris during a debate for the price spikes that occurred after the Biden-Harris administration took office. However, Trump’s claim of the highest inflation in history was false, as inflation was much higher in 1980. The recent drop in overall inflation was driven by falling gas prices and a decrease in used car prices. Grocery prices remained unchanged from July to August, reflecting a cooling trend in food costs. Many Americans are still struggling to manage their budgets, with some resorting to visiting multiple stores to find the best prices.
Core inflation ticked up in August due to higher housing costs and spikes in airfare and hotel prices, which are expected to be temporary. Fed officials are closely monitoring housing costs and anticipate a more consistent cooling trend. As inflation falls back towards the Fed’s 2% target, policymakers are shifting their focus to supporting the job market, which is cooling. The Fed is expected to cut its benchmark interest rate from its 23-year high, with a modest quarter-point cut anticipated. Stock prices reacted negatively to the news, with the S&P 500 index falling about 1.6% in mid-morning trading.
Despite the expected rate cuts, the aim is to reduce borrowing costs across the economy, including mortgages, auto loans, and credit cards. Harris has proposed subsidies for home buyers and a federal ban on grocery price gouging to ease inflation. Trump’s strategy involves boosting energy production to reduce overall inflation. Several factors indicate that inflation will continue to slow, including lower oil prices, slower wage growth, and Fed Chair Jerome Powell’s comments on inflation coming under control. Overall, the gradual easing of inflation is expected to shape the economic landscape in the coming months.
