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Inflation continued to ease in August, signaling that the rapidly rising prices that plagued the U.S. economy for the better part of three years during the pandemic era are increasingly moving into the rearview mirror.
Overall inflationary pressures are “disappearing,” said Sarah House, senior economist at Wells Fargo Economics.
THE consumer price index — which measures how quickly prices are changing across the U.S. economy — rose 2.5 percent in August from a year earlier, according to the U.S. Labor Department was mentioned Wednesday.
This figure is down from 2.9% in July and is the lowest reading from February 2021.
However, some pockets of potential concern remain housing Perhaps the most worrying of these, economists said. But prices for basics like groceries and petrol have normalized and the inflationary trend is seen steadily downward, they said.
“We expect inflation to continue to ease,” albeit with “some ups and downs” in the data from month to month, House said.
“Tamed” but not “defeated”
August’s measure of inflation is down significantly from its pandemic-era peak of 9.1% in mid-2022, which was the highest level since 1981.
It also reaches out to policy makers” long-term target of around 2%.
“Overall, inflation appears to have been tamed successfully, but with housing inflation still refusing to moderate as quickly as expected, it has not been completely defeated,” Paul Ashworth, chief North American economist at the Capital Economics. .
With that in mind, the Federal Reserve is expected to begin cutting interest rates this month as its focus shifts from tackling inflation to staving off recession in the face of a chilly labor market.
The central bank raised interest rates to their highest level in 23 years amid the pandemic, raising the cost of borrowing for consumers and businesses in a bid to tame inflation.
Both House and Ashworth expect the Fed to cut interest rates by a quarter of a percentage point at its next policy meeting next week.
Housing inflation is easing but still high
Inflation for physical goods jumped as the US economy reopened in 2021.
The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining out and entertainment. Supply shortages coincided with higher consumer demand.
Services inflation – which is generally more sensitive to labor costs – also jumped, partly affected by a historically hot labor market as employers clamored for workers when the economy reopened, economists said.
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Housing, which is counted under the “services” category, has been a big drag on overall inflation falling to the Fed’s target, economists said.
Shelter is the largest component of the CPI and therefore has an outsized effect on inflation measurements.
The shelter index has risen 5.2 percent since August 2023, accounting for more than 70 percent of the annual increase in the “core” CPI, the Bureau of Labor Statistics, or BLS, said Wednesday. Core CPI is economists’ preferred indicator of inflation trends. It reduces food and energy costs, which can be volatile.
Housing inflation moves up and down at a glacial pace because of how the government measures it, economists said.
Such data quirks mask positive news in the real-time rental market, which has seen little inflation in about two years, economists said. Median rents actually deflated, meaning prices fell 1% in the second quarter of 2024 compared to a year earlier, according to the BLS New Rent Index.
However, shelter inflation appears to be defying gravity recently: it has risen on a monthly basis for two consecutive months, from 0.2% in June to 0.4% in July and then to 0.5% in August.
“It’s confusing, in all honesty,” House said. “[But] I’m of the opinion that we should continue to see shelters decelerate,” given the broader trends in the rental market.
Other “important” categories
More broadly, other categories with “notables increases’ over the past year include motor vehicle insurance, where prices rose 16.5% from August 2023, medical care, up 3%, leisure, up 1.6% and education, up by 3.1%, the BLS reported.
A rise in new and used car prices a few years ago is now likely to fuel high inflation for vehicle insurance and repair as it generally costs more to insure and repair more expensive cars, economists said.
Insurance inflation should eventually fade along with falling car prices, they said. New vehicle prices have fallen by about 1% over the past year, and prices for used cars and trucks are down more than 10%.
Egg prices — which had soared in 2022 due to a historic bird flu outbreak — are rising again after the deadly disease re-emerged. They increased by 28% compared to a year ago.
Headline annual grocery inflation was less than 1% in August, down from an average of 11.4% in 2022which was the highest since 1979.
Gasoline prices have also fallen by about 10% over the past year.
