Inflation continued its downward trajectory in August, according to data released Wednesday morning, though the focus for the health of the U.S. economy has largely shifted from whether inflation will subside to what the cost of that shift is.
Consumer price increases have slowed from their 2022 peak, but inflation remains above the historic ... [+]
Headline inflation was 2.5% last month, according to year-over-year changes in the consumer price index (CPI) reported by the Bureau of Labor Statistics, a touch below consensus economist estimates of 2.6%, according to FactSet.
Down from July’s 2.9% inflation, it’s the lowest CPI reading since Feb. 2021, though inflation remains above the Federal Reserve’s 2% long-term target.
Core inflation, which excludes more price-sensitive food and energy subindexes, was 3.2%, compared to forecasts of 3.2%, where it stood in July.
Headline and core inflation climbed 0.2% and 0.3% from July to August, respectively, compared to forecasts of 0.2% month-over-month increases, where each metric stood from June to July.
The slightly worse than expected uptick in core inflation sent stocks downward, as it doused some investors’ hopes for very light inflation to bolster an aggressive monetary policy shift; futures for the Dow Jones Industrial Average were down about 270 points, or 0.7%, five minutes after the report.
The most commonly cited measure of inflation, CPI tracks price changes in a predetermined, weighted basket of goods and services the typical American may purchase in a given period. Inflation ran amok beginning in 2021 as several factors came to a head, including the U.S. economy kicking back into gear as the COVID-19 pandemic eased, a surge in energy prices globally as the U.S. and its allies cut off Russian imports and the lingering effects of pandemic stimulus checks. Headline CPI inflation peaked at a 41-year high of over 9% in mid-2022. Subsiding inflation came as the Federal Reserve hiked interest rates from their near-zero level from March 2020 to March 2022 to the 5.25% to 5.5% range they’ve sat since last July.
The Fed’s rate-hiking campaign bore the desired fruit of tamed inflation, but the potentially damaging second-order effects of such aggressive monetary policy has started to rear its head. As is historically the case, lower inflation has brought higher unemployment, with the jobless rate up almost a full percentage point from its 2023 low, escalating fears about the health of the U.S. labor market and the potential for a full-fledged recession.
21%. That’s how much the consumer index rose from August 2020 to August 2024, equating to annualized inflation of 5.3%. Average hourly wages have climbed by 19% over the period, reflecting the discontent among many Americans as paychecks stretch thinner than they used to.
The Fed’s policy-setting committee will meet next Tuesday and Wednesday to determine whether they will cut rates. Traders price in a full 100% chance the central bank will lower rates, but the question is how sharply they will act to stimulate the economy. The CME FedWatch Tool indicated the market-implied odds of a 0.25 percentage point cut was about 70% compared to roughly 30% for a more aggressive 0.5 percentage point cut before the CPI release. Bets subsided as the arguably more important core inflation reading came in slightly hotter than anticipated, with the odds of a 0.5 percentage point cut declining to about 20% after the release.