In the United States, inflation may have dipped to a three-year low in August, indicating that the pace of price hikes is reverting to levels seen before the pandemic. This development opens the path for the Federal Reserve to consider reducing its key interest rate next week. According to an economist survey by FactSet, year-over-year inflation likely decreased to 2.6% last month, marking the lowest rate since March 2021. Core inflation, which excludes volatile food and energy prices, is anticipated to remain steady at 3.2%.
Following a peak of 9.1% in June 2022, the highest in four decades, due to a swift recovery from the pandemic recession, the Federal Reserve responded with raising its key rate significantly with 11 rate hikes in 2022 and 2023. The inflation figures are expected to resonate in the final weeks of the presidential race. Former President Donald Trump has blamed Vice President Kamala Harris for the inflation surge, which began in early 2021 due to global supply chain disruptions, leading to shortages of parts and labor. Harris has proposed housing subsidies to alleviate costs and supports a federal ban on price gouging in groceries. In contrast, Trump aims to boost energy production to combat inflation overall.
The Federal Reserve has indicated growing confidence in the steady decline of inflation towards their 2% target, shifting focus to supporting the cooling job market. The Fed’s mandate includes maintaining stable prices and achieving maximum employment. Lowering the Fed’s benchmark rate is expected to reduce consumer and business borrowing costs over time, including mortgages, auto loans, and credit cards.
Christopher Waller, a key policymaker at the Fed’s Board of Governors, recently noted significant progress towards the inflation goal, anticipating continued improvement throughout the year. Factors contributing to the expected inflation decrease include a decline in gas prices by approximately 10 cents per gallon in August, alongside slower rises in grocery prices and rents. Despite a 20% increase in food prices from pre-pandemic levels, prices have only risen 1.1% from a year ago.
Furthermore, the moderation in new apartment lease costs and slower wage growth of around 3.5% annually also act as mitigating forces against inflation. Fed Chair Jerome Powell highlighted the control over inflation and downplayed the job market as a source of inflationary pressure. Consequently, the Fed is preparing to cut its key rate during the upcoming meeting to boost growth and hiring. However, a rise in consumer debt and concerns over spending sustainability could potentially lead to limited hiring or job cuts by employers. The Fed is anticipated to initiate a modest quarter-point rate cut next week, with the possibility of a half-point reduction. Traders on Wall Street foresee a half-point rate cut at the subsequent meeting in November, based on futures prices.
