Grace Carey | Moment | Getty Images
Inflation continued to slow in August, suggesting that the fast-rising prices that have plagued the U.S. economy for most of the three years during the pandemic era are increasingly moving backward.
Overall inflationary pressures are “dissipating,” said Sarah House, senior economist at Wells Fargo Economics.
The Consumer Price Index — which measures how quickly prices are changing across the U.S. economy — rose 2.5% in August from a year earlier, the Labor Department reported Wednesday.
This figure was down from 2.9% recorded in July and was the lowest reading since February 2021.
But economists said there were pockets of concern, with housing perhaps the most worrying. But prices for basic goods like groceries and gasoline have returned to normal and inflation appears to be headed firmly down.
“We expect inflation to continue to decline,” House said, despite “some ups and downs” in the data from month to month.
“tamed” but not “defeated”
The August inflation reading was down sharply from the pandemic-era peak of 9.1% in mid-2022, the highest level since 1981.
Growth is also approaching policymakers' long-term target of around 2%.
“Overall, inflation appears to have been successfully tamed, but with housing market inflation refusing to moderate as quickly as hoped, inflation is not fully defeated,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a note Wednesday morning.
With that in mind, the US Federal Reserve is expected to begin cutting interest rates this month as its focus shifts from tackling inflation to avoiding recession in the face of a slowing labour market.
The central bank raised interest rates to their highest level in 23 years during the pandemic, sending borrowing costs higher for consumers and businesses in an attempt to tame inflation.
Both House and Ashworth expect the Fed to cut interest rates by a quarter percentage point at its next policy meeting next week.
House price inflation eases but remains high
Inflation rates for physical goods rose as the U.S. economy reopened in 2021.
The COVID-19 pandemic has disrupted supply chains, while Americans have spent more on their homes and less on services like dining out and entertainment. The supply shortage has coincided with increased consumer demand.
Economists said inflation in the services sector — which is typically more sensitive to labor costs — also rose, driven in part by a historically hot labor market as employers demanded workers as the economy reopened.
More Personal Finance:
'Seismic collapse' nears end as US economy quietly sinks
US labor market slows but not yet triple-alarm
Retirees who move to other locations want to lower their costs of living and improve their lifestyles.
Economists said housing, which falls under the “services” category, was a major drag on overall inflation falling to the Fed's target.
Shelter is the largest component of the CPI, and therefore has a large impact on inflation readings.
The Bureau of Labor Statistics said Wednesday that the housing index has risen 5.2% since August 2023, accounting for more than 70% of the annual increase in the “core” consumer price index. The core CPI is economists’ preferred measure of inflation trends because it strips out food and energy costs, which can be volatile.
Economists say housing price inflation moves up and down at a snail's pace because of the way the government measures it.
Economists said such odd data masked positive news in the real-time rental market, which has seen little inflation for about two years. Median rents, meaning prices have actually fallen, actually fell 1% in the second quarter of 2024 from a year earlier, according to the Bureau of Labor Statistics’ New Renters Rent Index.
However, housing consumer price inflation has seemed to defy gravity lately: it has risen on a monthly basis for two months in a row, from 0.2% in June to 0.4% in July, and then to 0.5% in August.
“It's quite puzzling, frankly,” House said. “(But) I think we should continue to see a slowdown in the housing market” in light of broader trends in the rental market.
Other “Noteworthy” Categories
More broadly, other categories that saw “notable increases” over the past year include motor vehicle insurance, with prices up 16.5% from August 2023; medical care, up 3%; entertainment, up 1.6%; and education, up 3.1%, the BLS said.
Economists say the surge in new and used car prices a few years ago is now likely to drive up inflation in auto insurance premiums and vehicle repairs, because more expensive cars generally cost more to insure and repair.
They said insurance inflation is expected to eventually fade as auto prices fall. New car prices have fallen about 1 percent over the past year, and used car and truck prices have fallen more than 10 percent.
Egg prices – which surged in 2022 due to an outbreak of bird flu – are on the rise again after the deadly disease resurfaced. They are up 28% from a year ago.
The overall annual grocery price inflation rate fell to less than 1% in August, down from an average of 11.4% in 2022, the highest since 1979.
Gasoline prices are also down about 10% from last year.
