In September, inflation reached its lowest level in three years, primarily due to a decrease in gasoline prices, which countered increases in used car prices and auto insurance costs. However, the overall rise in prices fell less than anticipated, and a measure of underlying inflation showed a slight increase.

This recent dip in inflation likely puts the Federal Reserve on the path to reducing interest rates by a modest quarter of a percentage point next month, following an initial half-point cut in September that boosted the stock market.

According to the Labor Department’s consumer price index—a broad measure of the cost of goods and services—overall consumer prices rose by 2.4% compared to a year earlier. This is down from 2.5% in August and marks the smallest increase since February 2021. This also represents the sixth consecutive decline, keeping inflation somewhat above the Fed’s target of 2%.

On a month-to-month basis, prices increased by 0.2%, reflecting the same increase as the previous month.

Current Core Inflation Rate

Core inflation, which excludes the often fluctuating prices of food and energy and is closely monitored by the Fed, rose by 0.3%, the same as in August. This led to an increase in year-over-year core inflation to 3.3%, up from 3.2% the previous month.

Food and energy prices are generally more subject to change, reacting quickly to global commodity price changes in oil and wheat. Consequently, the Fed prefers looking at more stable price trends, which better reflect consumer and business demand that can be influenced by interest rates.

Current Fed Interest Rate

After reducing a key interest rate by half a point in September, Federal Reserve officials indicated that they are likely to lower it by a quarter point at their remaining meetings this year, provided inflation continues to decrease. This would bring the rate down from about 4.8% to around 4.3%.

As inflation appears to trend towards the Fed’s target of 2%, a significant change in the labor market—either weak or strong—would likely be necessary to change this rate-cut plan, according to Bank of America’s analysis for clients. In September, U.S. employers unexpectedly added an impressive 254,000 jobs, alleviating fears of a sharp decline in employment growth and a potential recession.

From March 2022 to July 2023, the Fed raised its benchmark short-term rate from nearly zero to a peak of 5% to 5.25%, aiming to curb inflation.

Reasons for Falling Gas Prices in the US

Gas prices dropped by 4.1% in September and have either decreased or remained stable for four of the past five months, driven by slowing global economic growth and high U.S. oil production that have contributed to lower crude oil prices. The average price of regular unleaded fuel was $3.20 a gallon on Wednesday, down from $3.27 the previous month and $3.70 a year ago.

Are Rents Decreasing in the US?

Rent prices climbed by 0.3% in September, following a 0.4% increase in the prior month. This lowered the annual rent increase from 5% to 4.8%, the smallest rise since April 2022. Decreasing rents for new leases are beginning to impact rates for current tenants.

This is encouraging news, as housing costs have been a major factor in driving inflation, accounting for 36% of the price increase last month.