US inflation reached a 3-year low as consumer prices rose 2.5% in August, down from 2.9% in July.
Core prices, excluding volatile food and energy costs, rose 3.2% in August, the same as in July, indicating a stable inflation trend.
The big picture: The drop in overall inflation was attributed to lower gas prices and a decline in used car prices, while grocery prices remained unchanged, indicating a cooling in food costs.
- The Federal Reserve is preparing to cut interest rates to support the job market as they become increasingly confident that inflation is falling back to its 2% target.
Why it matters: The decline in inflation has resulted in gradual relief for consumers who experienced price surges in the past, including high food, gas, rent costs.
- Inflation peaked in mid-2022 at 9.1%, the highest level in four decades.
Go deeper: Factors contributing to the drop in overall inflation include decreased gas prices and a decline in used car prices.
- Grocery prices remained unchanged, indicating a slight cooling in food costs, while food inflation remained modest over the past year.
- Household incomes have outpaced inflation over the last 18 months, with the median real income rising by 4% to over $80,000 last year. However, many Americans are still conscious of managing their budgets and seeking ways to save money amid elevated prices.
What we’re watching: The Fed’s focus is now shifting towards supporting the job market, with a possible interest rate cut anticipated to bolster growth and hiring. Fed officials are confident in inflation returning to their target level, anticipating further rate cuts over time to reduce borrowing costs across various sectors.
- Potential measures suggested to address inflation include subsidies for home buyers and builders as proposed by Vice President Harris and an increase in energy production as proposed by Trump. Signs like declining oil prices and slower wage growth are indicating a trend towards slowing inflation.
