US inflation eased to 2.5% in August, its lowest point since early 2021

Prices are easing their pressure in the United States. The pace of inflation in August was 2.5% from a year earlier, compared with 2.9% in July, according to data released Wednesday by the Bureau of Labor Statistics. The annual rate of increase in prices is the lowest since early 2021. On a monthly basis, consumer prices rose 0.2% in August. The data further paves the way for the Federal Reserve to lower interest rates for the first time in four and a half years at its meeting on September 18.

The only blip is core inflation, which excludes food and energy. It remains at 0.3% for the month and 3.2% year-on-year, which shows that the battle to control the surge in prices is not over. Analysts were expecting a rise of 0.2%, although the difference is a few hundredths of a percent, because they did estimate a year-on-year rate of 3.2%. The difference between the two rates is mainly due to the 10.3% year-on-year drop in gasoline prices, which together with that of fuel oil has cut energy prices by 4%. Food prices also rose less than the average, by 2.1% year-on-year, mainly due to the containment of food consumed at home (+0.9% year-on-year).

The United States has left behind its highest inflation in four decades. After peaking at 9% in mid-2022, it has eased sharply, in part due to the most aggressive interest rate hikes since the 1980s. Federal Reserve Chairman Jerome Powell said he had increased confidence that inflation is heading sustainably toward the 2% target. The U.S. central bank’s concern has shifted from fighting inflation to preventing recession.

Although the responsibility for price stability lies primarily with the Federal Reserve, inflation has eroded the popularity of U.S. President Joe Biden and has become a favorite argument for Republicans, led by Donald Trump, to attack the current Democratic candidate, Kamala Harris. Just because inflation has fallen does not mean that prices as a whole have fallen, and although salary increases have long allowed purchasing power to increase, visits to the supermarket still attest to the high relative cost of many products compared to four years ago.

The consumer price index (CPI) is the most closely watched benchmark for inflation, although the Federal Reserve prefers to focus on the PCE index, a deflator of personal consumption expenditures, which already fell to 2.5% in July and is expected to fall again in August. Although Powell is not a fan of declaring victory or letting down his guard, he is clear that after a few years focused on the mandate of price stability, it is now time to turn his attention to the mandate of ensuring maximum employment.

The labor market has shown signs of weakness recently. The last three months have seen the lowest job creation since the recovery from the pandemic began. The unemployment rate has risen to 4.2%, causing some leading indicators of recession to jump, although it is still unclear whether this is a false alarm, as the increase in unemployment is not due to the loss of jobs but to the increase in the labor force.

In any case, the situation allows for the start of a rate cut cycle that will begin in a week, at the meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve. What is up in the air is the pace of this cycle. The quotes on the federal funds futures market assign a higher probability to the first cut being only 0.25 points, but there are investors who are betting on a more aggressive reduction of 0.50 points. Rates are now in the range of 5.25%-5.5%, their highest level since 2001.

At next week’s meeting, the Federal Reserve members will also publish their forecasts on where the price of money should be at the end of the year. Obviously, this is a qualified forecast, since those who must make the decision also participate in it, but it does not bind them to it nor is it particularly accurate. Nevertheless, it will be a highly valued clue for the market to guess at the magnitude of the more than likely cuts coming up in November and December.

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