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US inflation likely fell further last month as Fed prepares to cut rates next week
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Date:2025-04-12 16:17:11
WASHINGTON (AP) — Inflation in the United States may have hit a three-year low in August, underscoring that the rate of price increases is falling back to pre-pandemic levels and clearing the way for the Federal Reserve to start cutting its key interest rate next week.
Year-over-year inflation is thought to have slowed to 2.6% last month, according to a survey of economists by the data provider FactSet. That would be the lowest such rate since March 2021. And excluding volatile food and energy prices, core inflation is believed to have remained unchanged at 3.2%.
Inflation peaked at 9.1% in June 2022 — a four-decade high — as the economy rebounded from the pandemic recession with unexpected speed and strength. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and making loans much more expensive across the economy.
The latest inflation figures could inject themselves into the presidential race in its final weeks. Former President Donald Trump has heaped blame on Vice President Kamala Harris for the jump in inflation, which erupted in early 2021 as global supply chains seized up, causing severe shortages of parts and labor. Harris has proposed subsidies for home buyers and builders in an effort to ease housing costs and supports a federal ban on price-gouging for groceries. Trump has said he would boost energy production to try to reduce overall inflation.
Fed officials have signaled that they’re increasingly confident that inflation is steadily falling back to their 2% target and are now shifting their focus to supporting the job market, which is rapidly cooling. The Fed’s mandate is to seek stable prices and maximum employment.
Reductions in the Fed’s benchmark rate should, over time, reduce the cost of consumer and business borrowing, including for mortgages, auto loans and credit cards.
“Overall, I see significant and ongoing progress toward the (Fed’s) inflation goal that I expect will continue over the remainder of this year,” Christopher Waller, a key policymaker on the Fed’s Board of Governors, said last week.
Waller noted that for more than half the goods and services that the government tracks, annual inflation has fallen below 2.5%, a sign that price increases are broadly slowing.
A big reason why inflation likely fell last month is that gas prices tumbled by about 10 cents a gallon in August, according to the Energy Inflation Administration, to a national average of about $3.29.
Economists also expect the government’s measures of grocery prices and rents to rise more slowly. Though food prices are roughly 20% more expensive than before the pandemic, they are up just 1.1% from a year ago.
Another potential driver of slower inflation is that the cost of new apartment leases has started to cool as a stream of newly built apartments have been completed.
According to the real estate brokerage Redfin, the median rent for a new lease rose just 0.9% in August from a year earlier, to $1,645 a month. But the government’s measure includes all rents, including those for people who have been in their apartments for months or years. It takes time for the slowdown in new rents to show up in the government’s data. In July, rental costs rose 5.1% from a year ago, according to the government’s consumer price index.
Americans’ paychecks are also growing more slowly — an average of about 3.5% annually, still a solid pace — which reduces inflationary pressures. Two years ago, wage growth was topping 5%, a level that can force businesses to sharply raise prices to cover their higher labor costs.
In a high-profile speech last month, Fed Chair Jerome Powell noted that inflation was coming under control and suggested that the job market was unlikely to be a source of inflationary pressure.
As a result, the Fed is poised to begin cutting its key rate when it meets next week in hopes of bolstering growth and hiring. Consumers have propelled the economy for the past three years. But they are increasingly turning to debt to maintain their spending and credit card, and auto delinquencies are rising, raising concerns that they may have to rein in their spending soon. Reduced consumer spending could lead more employers to freeze their hiring or even cut jobs.
“We do not seek or welcome further cooling in labor market conditions,” Powell said.
The Fed is widely expected to cut its benchmark rate by a modest quarter-point next week, though it’s possible that its policymakers could instead decide that a half-point reduction is needed. Wall Street traders envision a half-point rate cut at the Fed’s subsequent meeting in November, according to futures prices.
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