In August, inflation dipped to its lowest point in over three years, largely due to declines in gasoline and used car prices, which countered increases in service costs, including car insurance and air travel.

This data likely supports the Federal Reserve’s intentions to begin lowering interest rates in the upcoming week, though the exact amount remains a topic of much debate. Economists note that this decision will likely depend on the rapidly cooling job market.

Overall prices rose by 2.5% from the previous year, down from 2.9% in July, according to the consumer price index from the Labor Department, which measures the costs of various goods and services in the U.S. This marks the smallest increase since January 2021 and represents the fifth consecutive decrease. Month-to-month, costs increased by 0.2%, consistent with the previous month.

What is the Current Core Inflation Rate in the US?

Core prices, which exclude the unpredictable categories of food and energy and are closely monitored by the Fed, saw a 0.3% rise following a 0.2% increase in July, keeping the annual core inflation rate at 3.2%.

Is US Inflation Decreasing?

After rising earlier this year, inflation has been on a decline since March as supply chain issues related to the pandemic have eased, leading to lower prices for goods like used cars and furniture.

While the costs of services, including rent, dining, and healthcare, have continued to rise, the rate of increase is slowing as labor shortages caused by COVID-19 are diminishing and wage growth is moderating.

Inflation peaked at a four-decade high of 9.1% in mid-2022, prompting the Fed to implement aggressive interest rate hikes.

What Rate Cut Can We Expect from the Fed in September?

Recently, Federal Reserve Chair Jerome Powell indicated that the central bank is likely to begin reducing its key interest rate next week as inflation shows signs of easing.

Most economists and futures markets anticipate a typical cut of a quarter-point. However, the speculation for a half-point reduction has increased after a disappointing job report this month, which revealed that only 142,000 jobs were added in August compared to the expected 163,000.

Analysts expect that the continued decrease of inflation in Wednesday’s data will keep the Fed on track for a quarter-point cut next week, but they suggest that further disappointing job market results may be needed to convince the Fed to implement a larger cut.

Futures markets predict a half-point rate cut in both November and December if the job market continues to soften and inflation keeps falling.

From March 2022 to July 2023, the Fed raised its key short-term interest rate from nearly zero to a 23-year peak of 5% to 5.25% in an effort to control inflation.

What is Causing Gas Prices to Drop?

In August, gasoline prices decreased by 0.6%, remaining flat or experiencing declines for four consecutive months as slowing global and domestic economic growth reduces demand for crude oil. Regular unleaded gasoline averaged $3.26 a gallon on Tuesday, down from $3.45 last month and $3.83 from a year ago.

Are Rents Decreasing in the US?

In August, rents rose by 0.4% after a 0.5% increase the month before. This brings the annual increase down to 5%, the lowest rate since April 2021. Economists have anticipated a slowdown in rent increases for existing tenants based on new leases, and we are beginning to see this trend happen more noticeably.

Housing costs have significantly contributed to inflation overall, representing 36% of the price rise last month.

Additionally, costs for some other services have risen. Auto insurance rates rose by 0.6% and have gone up by 16.5% over the past year. Car repair expenses also increased by 0.6%. Airline ticket prices surged by 3.9% after previously declining, and hotel costs increased by 1.8%.

In general, prices for goods have continued to decline. Prices for used cars dropped by 1%, while new cars remained stable, and furniture prices fell by 1%. Conversely, apparel prices saw a 0.3% ascent.