In August 2024, U.S. consumer prices rose by 0.2%, according to the latest report from the Bureau of Labor Statistics (BLS). This increase puts the annual inflation rate at 2.5%, the lowest it has been since February 2021. Despite the modest monthly rise, core inflation exceeded expectations, influencing market sentiment and prompting debate over the Federal Reserve’s next move on interest rates. With a potential interest rate cut on the horizon, analysts and investors are watching closely as the inflation picture evolves.
Key Findings of the August CPI Report
The Consumer Price Index (CPI) tracks the price changes of a broad set of goods and services in the U.S. economy. In August, the overall CPI rose by 0.2%, a figure that aligns with expectations. On a year-over-year basis, the inflation rate now stands at 2.5%, a notable decrease from July’s 2.9% rate. This cooling of inflation marks the lowest rate since February 2021, offering some relief to consumers and businesses that have weathered high inflation in recent years.
However, the core CPI, which excludes more volatile categories such as food and energy, rose by 0.3% in August, surpassing the anticipated 0.2% increase. Over the past 12 months, core inflation has remained elevated at 3.2%. This divergence between the overall inflation rate and the core CPI highlights persistent price pressures in some sectors of the economy, even as inflation has cooled overall.
Breakdown of Price Movements in August
- Shelter costs, a key component of the CPI with a one-third weighting, rose by 0.5% in August. Shelter costs accounted for approximately 70% of the increase in core inflation, signaling continued challenges in housing affordability. Year over year, the shelter index increased by 5.2%, underscoring the elevated costs of housing.
- Food prices edged up slightly by 0.1%, while energy prices fell by 0.8%. The pullback in energy costs, particularly gasoline, which dropped by 0.6% in August and 10.3% compared to last year, has helped to moderate overall inflation.
- Used vehicle prices fell by 1%, and medical care services prices dipped by 0.1%. In contrast, apparel prices rose by 0.3%, and egg prices saw a significant 4.8% increase.
In sum, the report reflects an economy where certain costs, particularly in housing and healthcare, remain sticky, while other sectors, such as energy and transportation, are seeing relief.
Real Earnings Growth and the Labor Market’s Role
Alongside the CPI report, the BLS also provided data on real earnings. In August, real average hourly earnings rose by 0.2%, meaning that wage growth outpaced the increase in consumer prices. This trend is positive for workers, as it indicates that their purchasing power is improving. On an annual basis, inflation-adjusted earnings increased by 1.3%, a notable rise compared to the previous year.
Despite these gains, the Federal Reserve is paying close attention to the cooling labor market. Since April, job creation has slowed, with employment growth nearly halving compared to the prior five months. This shift in the labor market dynamics adds another layer of complexity for policymakers, who must now balance the need to fight inflation with concerns about a potential economic slowdown.
The Fed’s dual mandate of promoting maximum employment and ensuring price stability has grown more complicated as the labor market shows signs of softening. Policymakers have indicated that they are increasingly focused on preventing a broader economic slowdown, even as they continue to monitor inflation closely.
Market Reactions and Interest Rate Outlook
The August inflation data has generated significant market reactions. Following the release of the CPI report, U.S. stock markets initially slumped, reflecting investor concerns about the higher-than-expected core inflation reading. However, stocks later rebounded as traders began to price in the likelihood of a smaller interest rate cut by the Federal Reserve.
According to the CME Group’s FedWatch tool, there is now an 85% chance that the Fed will approve a 25 basis point (0.25%) interest rate cut during its upcoming September 18 meeting. This is a shift from previous market expectations, which had leaned toward a more aggressive 50 basis point cut. The market’s revised expectations reflect the view that while inflation is moderating, core price pressures remain a concern.
Implications for Federal Reserve Policy
The higher-than-expected core CPI reading complicates the Fed’s path forward. While inflation has clearly cooled, particularly in areas such as energy and transportation, certain key sectors remain stubbornly high. Housing costs, which make up a significant portion of the CPI, continue to rise at an elevated pace, keeping pressure on the central bank to remain cautious in its rate-cutting cycle.
As Seema Shah, Chief Global Strategist at Principal Asset Management, noted, “This isn’t the CPI report the market wanted to see.” Shah added that core inflation’s resilience suggests that the Fed may need to be more careful with rate cuts, as it navigates the final stages of its inflation fight.
Persistent Inflationary Pressures and Consumer Impact
Although inflation has moderated, it is important to note that prices remain high compared to pre-pandemic levels. Lisa Sturtevant, Chief Economist at Bright MLS, emphasized that “U.S. consumers now are paying more than 20% more for goods and services than they were before the pandemic.” In other words, while inflation is not increasing as fast as it once was, the overall price level is still significantly higher than it was a few years ago.
Some specific areas where consumers are feeling the pinch include airline fares, which rose by 3.9% in August after several months of decline, and motor vehicle insurance, which increased by 0.6% for the month, pushing the 12-month rise in insurance costs to 16.5%. Hospital services also saw a price increase of 0.4% in August, contributing to a 5.8% year-over-year rise in healthcare costs.
These sectors reflect broader trends in the economy, where certain categories of spending, particularly those tied to services, are experiencing upward price pressures even as inflation has cooled in other areas.
Energy Costs Provide Some Relief
One bright spot in the inflation picture is the decline in energy prices, which have dropped significantly over the past year. In August, the energy index fell by 4%, driven by sharp declines in fuel oil (down 12.1%) and gasoline prices. Lower energy costs not only help to reduce headline inflation figures but also provide relief to consumers who are seeing lower prices at the pump and in their utility bills.
The decrease in energy prices is partly due to easing global supply chain pressures and a stabilization of crude oil prices after the volatility experienced in 2022. For consumers, these trends are welcome, as they offset some of the rising costs in other areas of the economy.
The Road Ahead for Inflation and Economic Growth
As inflation continues to moderate, attention is shifting toward the broader state of the U.S. economy. The recent inversion of the yield curve, a reliable recession indicator, has reversed, suggesting that markets are anticipating both interest rate cuts from the Fed and a potential economic slowdown. This indicator, which occurs when short-term interest rates exceed long-term rates, is often seen as a precursor to economic downturns.
However, it remains uncertain whether the U.S. economy will enter a recession in the coming months. While inflation is declining and the labor market is cooling, the broader economic picture is mixed. Consumer spending remains robust in some areas, and real wage growth suggests that households have more purchasing power than they did a year ago.
What to Expect from the Federal Reserve
The Federal Reserve is now facing a critical decision as it weighs the trade-offs between inflation control and supporting economic growth. While the Fed has been aggressive in its rate-hiking cycle, the recent cooling of inflation suggests that there may be room for a more measured approach going forward.
Markets are currently pricing in a 25 basis point rate cut at the Fed’s September meeting, but this decision will depend heavily on how the Fed interprets the latest inflation data. With core inflation still elevated, the central bank may opt for a more cautious path, reducing rates more gradually to avoid reigniting inflationary pressures.
As the U.S. economy enters the final months of 2024, the outlook for inflation and interest rates remains uncertain, but the trend of cooling inflation provides some hope for consumers and businesses alike.
