The post-pandemic spike in US inflation eased further last month as year-over-year price increases reached a three-year low, clearing the way for the Federal Reserve to cut interest rates next week. Wednesday's report from the Labor Department showed that consumer prices rose 2.5% in August from a year earlier. It was the fifth straight annual drop and the smallest such increase since February 2021, per the AP. From July to August, prices rose just 0.2%. Excluding volatile food and energy costs, so-called core prices rose 3.2% in August from 12 months earlier, the same as in July. On a month-to-month basis, core prices rose 0.3% last month, a pickup from July's 0.2% increase.
Economists closely watch core prices, which typically provide a better read on future inflation trends. For months, cooling inflation has provided gradual relief to America's consumers, who were stung by the price surges that erupted three years ago, particularly for food, gas, rent, and other necessities. Inflation peaked in mid-2022 at 9.1%, the highest rate in four decades. Fed officials have signaled that they're increasingly confident that inflation is falling back to their 2% target and are now shifting their focus to supporting the job market, which is steadily cooling. As a result, the policymakers are poised to begin cutting their key rate from its 23-year high in hopes of bolstering growth and hiring. A modest quarter-point cut is widely expected next week.
Over time, a series of rate cuts should reduce the cost of borrowing across the economy, including for mortgages, auto loans, and credit cards. In a high-profile speech last month, Fed Chair Jerome Powell noted that inflation was coming under control and suggested that the job market was unlikely to be a source of inflationary pressure. Consumers have propelled the economy for the past three years—but they're increasingly turning to debt to maintain their spending, and auto delinquencies are rising, raising concerns that they may have to rein in that spending soon. Reduced consumer spending could lead more employers to freeze their hiring or even cut jobs. (More inflation stories.)