By Jeanna Smialek
Inflation showed further signs of easing in August, setting the stage for the Federal Reserve to potentially reduce interest rates for the first time since early 2020 in their upcoming meeting.
However, indications of persistent inflation remained, prompting investors to increase their expectations that central bankers will cut borrowing costs by a quarter-point from the current 5.33%, rather than the half-point cut that some had previously anticipated.
The overall consumer price index rose 2.5% in August compared to a year ago, reflecting a noticeably slower inflation rate than July’s 2.9% and down significantly from a peak of 9.1% in 2022.
Nevertheless, the figure catching Wall Street’s attention on Wednesday was a monthly “core” index. This measure indicates how much prices increased between July and August after excluding food and fuel prices, which can often fluctuate. It increased to 0.3%, a bit higher than economists had predicted.
The specifics rendered this uptick significant: It occurred as housing prices showed unexpected rigidity. Shelter costs constitute a substantial portion of overall inflation; hence, if they don’t decrease as anticipated, they could hinder the pace of price increases from aligning with the Fed’s target.
Still, this complication did not alter the overarching narrative. Inflation has been on a gradual downtrend for a while, clearing the path for the Fed to adjust its policy approach as officials navigate the delicate balance of eradicating rapid price increases without destabilizing the economy.
“I still believe they have enough confidence to initiate rate cuts, but it implies: Don’t rush this process,” stated Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. “We’re still not entirely in the clear.”
High interest rates function like brakes applied to the economy. They lead to a slowdown in economic activity, making it harder for businesses to increase prices as demand wanes. However, Fed officials aim to proceed cautiously. Maintaining elevated rates for too long could overly dampen conditions, leading to higher unemployment and the risk of a recession.
Fed authorities are wary of making swift cuts if there’s a chance that inflation isn’t fully managed, as this could reactivate the economy and make inflation a persistent issue. At the same time, they don’t want to delay action and jeopardize the labor market’s health.
This is why officials have been vigilant in monitoring incoming inflation and employment statistics as they deliberate on the pace of movement, both during their two-day meeting wrapping up next Wednesday and in the forthcoming months.
Policymakers will present an overview of their future strategies next week when they plan to unveil new quarterly economic forecasts. These will sketch out a general trajectory for rates.
Next week’s Fed action will signify a pivotal moment in the economy, delivering the most explicit message yet that central bankers feel they are making strides in the battle against inflation, even if the challenge isn’t completely resolved.
Having initially surged in early 2021, inflation has gradually cooled for over two years and is finally nearing a typical rate.
Fed officials are officially targeting a 2% inflation rate, although they measure this ambition through the personal consumption expenditures price index. This measure incorporates some of Wednesday’s consumer price index data but comes with a lag. It too has been trending downwards.
Rosner-Warburton anticipates that housing expenses will decrease in the upcoming months, though there may be fluctuations along the way. For instance, she foresees used car prices rising again this fall.
“The overall direction is still evident,” she remarked. “It’s about the pace, and whether it will be consistent.”
As price increases align with the Fed’s target, consumers may feel as if they are regaining ground. For over a year, wage growth has outpaced price increases according to several metrics.
This brings positive news for the Biden administration, which has faced challenges in taking credit for its economic successes — including a robust job market — as rising prices eroded consumer confidence.
“With inflation returning to near-normal levels, it’s crucial to focus on maintaining the historic improvements made for American workers during this recovery,” stated Lael Brainard, head of the White House National Economic Council, following the report.
