US Inflation Drops to Three-Year Low, Fed to Start Rate Cuts
With inflation cooling in August, the Fed is set to begin cutting interest rates next week. Only one question remains, will the rate cut be 25bp or 50bp?
US inflation reached a significant milestone in August, with the annual rate cooling to 2.5%, the lowest in three years. This decline marks a key moment in the Federal Reserve’s ongoing battle against the post-pandemic price surge. Economists and policymakers are now increasingly confident that inflation is nearing the Fed’s target of 2%, signaling the potential for rate cuts in the coming months.
According to the Labor Department’s latest Consumer Price Index (CPI) report, overall prices rose by 0.2% in August, in line with market expectations. This brought the year-over-year inflation rate to its lowest level since February 2021. The core CPI, which excludes volatile food and energy prices, also saw a modest rise of 0.3% from July, maintaining a 12-month core inflation rate of 3.2%.
Despite these promising figures, some inflationary pressures remain stubborn, particularly in housing and travel sectors, complicating the Fed’s decision-making process. Seema Shah, chief global strategist at
Principal Asset Management, commented on the recent report:
“This isn’t the CPI report the market wanted to see. With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated.”
Gradual Relief for Consumers
For U.S. consumers, the easing inflation is welcome news. Price increases peaked at 9.1% in mid-2022, the highest in four decades. Since then, Americans have endured rising costs, especially for essentials like food, gas, and housing. Although prices have slowed, many households are still feeling the effects of high living costs. As shopper Kelsey Aubrey from North Palm Beach, Florida, explained, “We hop from store to store, trying to save where we can. Our bills are still pretty high.”
Grocery prices, while higher than pre-pandemic levels, have stabilized, with no change from July to August and a modest 0.9% increase over the past year. Meanwhile, gas prices fell for the third time in four months, dropping 0.6% in August and down 10.6% compared to a year ago. Used car prices also declined, offering additional relief to consumers as they tumbled 10.4% over the past year.
Housing and Labor Markets in Focus
While overall inflation is cooling, certain sectors remain hot, especially housing. Rental costs, which make up a significant portion of the CPI, continue to rise, with the government’s data showing a 5.2% annual increase in rental prices. The shelter component accounted for about 70% of the core inflation increase last month, further complicating the outlook for the Fed. Still, there are signs of moderation as the real estate brokerage Redfin reported a slight 0.9% annual increase in new lease prices.
The labor market is also catching the Fed’s attention as job creation slows, and unemployment rates fluctuate. In August, nonfarm payrolls increased below expectations, but the unemployment rate dipped to 4.2%, down from 4.3% in July. These trends suggest a cooling labor market, which may alleviate inflationary pressure in the long term. In fact, wage growth has slowed to an average of 3.5% annually, down from 5% two years ago.
Fed Rate Cut Decision Looms
The Federal Reserve’s next policy meeting is scheduled for September 18-19, and financial markets are heavily betting on a quarter-point rate cut. Currently, the Fed’s benchmark interest rate is at a 23-year high, but as inflation comes under control, there is increasing speculation that the Fed will shift focus toward supporting economic growth and employment.
Carl Weinberg, chief economist at High Frequency Economics, noted the significance of the inflation data:
“Today’s report will add to confidence within the Fed that inflation is indeed on a sustainable path towards 2%.”
As the U.S. economy grapples with both slowing inflation and labor market challenges, the Fed’s decisions in the coming months will be crucial. Rate cuts could ease borrowing costs for mortgages, auto loans, and credit cards, potentially providing more breathing room for consumers and businesses alike. However, with core inflation remaining sticky in certain sectors, the central bank may proceed cautiously, ensuring that inflation does not accelerate.
US Market Activity
Following this morning’s release of the August CPI inflation report, US markets, after starting the day in the red, rebounded in the afternoon with the S&P 500 Index ($SPX) closing the day at 5,554.13, up 1.07%.
Meanwhile, the Dow Jones Industrials Average ($DOWI) closed up 0.31% at 40,861.71, while the NASDAQ Composite ($NASX) finished the day at 17,395.53, up 2.17%.
The SPDR SP 500 ETF Trust (NYSE Arca: SPY), a popular ETF that effectively mimics the price and yield performance of the S&P 500 Index, closed the day at $554.42, up 1.03%.
Notable movers from Wednesday’s trading session include Nvidia (NASDAQ: NVDA), which saw its shares climb 8.15%, closing at $116.91.
Following last night’s Presidential debate, shares of Donald Trump’s company Trump Media & Technology Group (NASDAQ: DJT), which were already under pressure due to its looming lock-up deal expiration, sank to a new all-time low today plummeting another 10.47% to close at $16.68.
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Disclaimer: Wealthy VC does not hold a position in any of the stocks, ETFs or cryptocurrencies mentioned in this article.
