Key U.S. inflation gauge shows prices cooled in August, increasing likelihood of further rate cuts

The Federal Reserve's favored inflation measure Friday provided the latest sign of easing price pressures, a trend that is expected to fuel further Fed interest rate cuts this year and next.

Prices rose just 0.1% from July to August, the Commerce Department said, down from the previous month's 0.2% increase. Compared to a year earlier, inflation fell to 2.2%, down from 2.5% in July and barely above the Fed's 2% inflation target.

Slowing inflation could erode former President Donald Trump's economic advantage in the polls. In a survey conducted last week by The Associated Press-NORC Center for Public Affairs Research, respondents were almost evenly divided on whether Trump or Vice President Kamala Harris would do a better job on the economy. This is a significant change from when President Joe Biden was still in office, when about six in 10 Americans disapproved of his handling of the economy. This shift suggests Harris could shed some of Biden's economic baggage as consumer confidence begins to improve.

Grocery prices barely rose last month, according to Friday's report, and energy prices fell 0.8%, driven by cheaper gasoline.

Excluding volatile food and energy costs, so-called core prices rose just 0.1% from July to August, also down from the previous month's 0.2% rise. This is the fourth consecutive time that monthly price increases have fallen below the 2% annual rate, the Fed's target. Compared to 12 months earlier, underlying prices increased by 2.7% in August, slightly more than in July.

The Federal Reserve's interest rate cut is already affecting some prices 02:47

“Persistent inflation is yesterday’s problem,” Samuel Tombs, chief U.S. economist at Pantheon Macronomics, said in a research note.

As inflation fell from its 2022 peak to just above the Fed's 2% target, the central bank last week cut its benchmark interest rate by an unusually half-point important, a dramatic change after more than two years of high rates. Policymakers also indicated they planned to cut their policy rate by another half point in November and December. And they are considering four more rate cuts in 2025 and two in 2026.

The continued decline in inflation makes a further reduction in its key rate even more likely in the coming months.

“From the Fed's perspective, cumulatively, we think the data shows enough progress on key inflation indicators for policymakers to continue cutting rates,” said Carl B. Weinberg, an economist in chief ; and Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a Friday research note. “Nominal spending and lower-than-expected revenues encourage them to continue easing.”

On Thursday, Tom Barkin, president of the Federal Reserve Bank of Richmond, expressed support for a cautious approach to rate cuts. In an interview with the Associated Press, he said he favored cutting the Fed's policy rate “somewhat.” But Barkin said he wanted to make sure inflation continued to cool before cutting the benchmark rate to a level that would no longer hold back the economy.

Lukewarm consumer spending

Friday's report also showed that Americans' income and spending rose only slightly last month, with both rising just 0.2%. Still, the modest increases coincide with upward revisions this week to last year's revenue and spending figures. These revisions showed that consumers were on average in a better financial situation than previously reported.

“Consumer spending was a little weaker than expected, mainly due to relatively weak spending on goods,” said Olu Sonola, head of U.S. economic research at Fitch Ratings. “All things considered, this month's report does not push the Fed in the direction of another drastic 50 basis point cut in November. Two 25 basis point cuts seem even more likely in November and December. “

Americans have also saved more of their income in recent months, according to the revisions, leaving the savings rate at 4.8% in September after previous figures showed it below 3%.

The government announced on Thursday that the economy grew at a healthy 3% annually in the April-June quarter. And it said economic growth was higher than it previously estimated for most of the 2018 to 2023 period.

The Fed tends to favor the inflation gauge released by the government on Friday – the Personal Consumption Expenditures Price Index – over the better-known Consumer Price Index. The PCE index attempts to account for changes in the way people shop when inflation rises. This can take into account, for example, when consumers abandon more expensive national brands in favor of cheaper private labels.

In general, the PCE index tends to have a lower inflation rate than the CPI. This is partly explained by the fact that rents, which have been high, have twice the weight in the CPI than in the index published on Friday.

Recent reports suggest that the economy continues to grow at a healthy pace. On Thursday, the government confirmed its previous estimate that the U.S. economy grew at a healthy 3% annually between April and June, boosted by strong consumer spending and business investment.

Trump, Harris campaign on economy as polls show VP gaining ground on issue 02:27

Several individual barometers of the economy also proved reassuring. Last week, the number of Americans filing for unemployment benefits fell to a four-month low.

And last month, Americans increased their spending at retailers, suggesting that consumers are still able and willing to spend more despite the cumulative impact of three years of excessive inflation and high borrowing rates.

The country's industrial production has also rebounded. The pace of construction of single-family homes increased sharply compared to the previous year. And this month, consumer confidence rose for a third straight month, according to preliminary figures from the University of Michigan. This more encouraging outlook is explained by “more favorable prices perceived by consumers” for cars, household appliances, furniture and other long-lasting goods.

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