Inflation fell four-tenths of a percentage point to 2.5% for the year in August, the Bureau of Labor Statistics reported Wednesday, marking five months of disinflation and providing good news for Vice President Kamala Harris as she campaigns for president.
Economists had expected that inflation would fall from 2.9% to 2.6%.
Inflation is now the lowest it has been since February 2021, shortly after President Joe Biden was sworn in.
On a month-to-month basis, inflation rose 0.2%.
Inflation is the biggest concern facing voters, so the White House and Harris campaign are undoubtedly breathing a sigh of relief that inflation continued trending down. Republicans have worked hard to tie Harris to the economy.
The Federal Reserve, which has raised interest rates to their highest level since the turn of the century, will also be pleased to see inflation continuing its descent back to earth. Continued declines will allow the Fed to cut interest rates, which would be good news for consumers and the labor market.
Core CPI inflation, a measure of inflation that strips out volatile energy and food prices, remained at 3.2% on an annual basis, right in line with expectations. Month-to-month core inflation punched in at 0.3%.
The elephant in the room for the Fed and for the Harris campaign is recent indications that the labor market is softening.
The economy added 142,000 jobs in August, reflecting a downward trend in job creation in recent months. The unemployment rate is now 4.2%, an increase from recent lows of 3.4%.
In another sign that the labor market is cooling, job openings plunged in July to their lowest level since January 2021, when President Joe Biden first entered office.
If the labor market softens further, it could force the Fed’s hand in cutting rates even more aggressively, something that would be bad news if the inflation rate doesn’t keep moving down.
The recession indicator known as the Sahm rule has also been triggered for two months in a row. That indicator is triggered when the three-month moving average of the unemployment rate rises half a percentage point relative to its minimum point over the past year. It has signaled the start of all postwar recessions.
Ahead of the Wednesday CPI report, investors and economists were predicting the Fed would cut rates at its September meeting, but were split on how much. Some expected a standard 0.25-percentage point cut, while others anticipated a bigger half-percentage point revision.
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All economic data will be closely watched leading up to the election. Democrats and the Biden administration have worked to emphasize bright spots in the economy, such as robust economic output, while Republicans have blamed too-high inflation on the administration and, in turn, on Harris.