Key Takeaways
- Prices for goods and services likely rose only modestly in August, with year-over-year inflation falling to an annual rate of 2.6%, the lowest in more than three years.
- Inflation falling closer to the Federal Reserve’s goal of a 2% annual rate clears the path for the Fed to cut the central bank’s benchmark interest rate starting in September.
- Economists will keep a close eye on rent, which is the biggest driver of inflation and expected to cool significantly.
Household budgets likely got a welcome break in August, with prices falling or staying flat for important items including food and gas, if forecasts of an upcoming inflation report are correct.
The Consumer Price Index (CPI) report Wednesday should show prices rose 2.6% over the year through August, down from a 2.9% annual increase in July, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
Falling prices for gas and stable prices for food likely helped keep overall inflation in check, several economists said. If the prediction holds, the annual inflation rate would be a fresh low since March 2021.
Has Inflation Been Tamed?
Should inflation stay tame as forecasters expect, it would bolster the recent evidence that consumer prices are well on their way back to the stability that people had gotten used to before the pandemic.
Starting in March 2022, the Fed hiked its benchmark rate to its highest since 2001, pushing up borrowing costs on mortgages, car notes, and other loans in an effort to quell the post-pandemic surge of inflation. Since then, inflation has cooled, nearly reaching the Federal Reserve’s goal of a 2% annual rate, prompting Fed officials to pivot to rate cuts.
Whether CPI inflation meets economists’ expectations will largely depend on how quickly rents rose. Housing costs make up two-thirds of the overall value of the price index.
Many economists expect rent to start putting downward pressure on inflation as official government measures catch up to cooling rent increases shown by other, more up-to-date data sources. Last month’s report defied those expectations, showing an unexpected rent increase.
What Does It Mean For the Federal Reserve?
Cooling inflation would also be welcome news to officials at the Federal Reserve who manage the nation’s monetary policy and could pave the way for the central bank to make a series of cuts to its benchmark interest rate at its three remaining meetings this year.
The inflation report will be one of the last major economic data releases Fed officials see before they decide on their interest rate moves at the Sept. 17-18 policy meeting.
Fed officials are widely expected to cut the influential fed funds rate by a quarter of a percentage point, but financial markets are pricing in an outside chance of a larger half-point cut, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
“Barring some extraordinary surprises, there should be nothing in this report that would deter the Fed from making a rate cut and quite possibly a large one,” Dean Baker, senior economist at the Center for Economic and Policy Research think tank wrote in a commentary.
A larger cut would boost the economy, potentially bolstering the increasingly shaky job market, but it would also take some of the downward pressure off inflation.