A dual win for consumers: Inflation cooled last month, paving way for borrowing costs to come down more
Inflation Cools Significantly, Bringing Good News for Americans and Federal Reserve #
Inflation cooled significantly last month, likely giving central bankers more confidence to continue cutting interest rates. The Personal Consumption Expenditures price index showed consumers paid 2.2% more for goods and services for the year ended in August, versus 2.5% in July. This marks another step closer toward the 2% inflation target, as well as the lowest inflation rate seen since February 2021, when inflation clocked in at 1.9%.
The annual increase was below the 2.3% rate economists projected. On a monthly basis, prices rose 0.1% in August versus the 0.2% increase in July, matching estimates.
‘Core’ inflation, which strips out volatile food and energy prices, rose last month to an annual pace of 2.7% from 2.6% in July. The acceleration was in line with what economists expected. For the month, core inflation inched up by 0.1% in August from 0.2% in July.
The progress seen in recent months — with inflation getting closer to 2% as well as cooling labor market conditions — pushed central bankers to cut rates by an unusually large half point earlier this month instead of the more traditional quarter-point move. Friday’s inflation report signals that another big cut that helps alleviate borrowing costs for Americans may be on its way.
Some officials have expressed concerns that bigger cuts could unnecessarily stoke demand, fueling higher prices. While Friday’s report may be seen as a welcome sign, it may not be enough to convince all officials to vote for a half-point cut at the next meeting.
The report also showed that consumers have more savings than previously thought. For the past few months, consumers were saving about 5% of their disposable income, rather than the previously reported 3%. However, consumers are still saving less than they had been before the pandemic, when the personal saving rate was around 7%.
Economists suggest that this indicates households may have more resources to support consumption. However, data from upcoming job reports is likely to carry significant weight when officials make decisions on future rate cuts.
Some experts feel that even if the central bank were to lower rates by another half point, they’d still be high enough to stop consumers from going on major spending sprees. On the other hand, lower- and middle-income consumers in particular are suffering financially and may need some interest rate relief.