As a presidential race heavily influenced by Americans’ frustration with rising prices neared its end, the government said Thursday that a measure of inflation closely monitored by the Federal Reserve had fallen to near pre-pandemic levels.
The Commerce Department reported that prices rose just 2.1% in September from a year earlier, down from a 2.3% rise in August. That’s barely above the Fed’s 2% inflation target, and in line with readings in 2018, long before prices started rising after the pandemic recession.
On a monthly basis, prices rose 0.2% from August to September, slightly higher than the 0.1% increase from July to August.
However, there are still some signs of inflationary pressures. Excluding volatile food and energy costs, core prices rose 2.7% in September from a year earlier, unchanged from August. On a monthly basis, core prices rose 0.3% in the August-September period, after being only 0.1% in the July-August period.
The increase in the benchmark interest rate is higher than the Fed prefers, and if it remains stubbornly high, that could prompt the central bank to slow the pace of interest rate cuts in the coming months.
However, over the past six months, core inflation has fallen to an annual rate of 2.3%, from 2.5% in August. Economists expect the Fed to cut its key interest rate by a quarter of a percentage point when it meets next week.
In all, the latest signs of a sustained cooling in inflation arrive five days before an election in which many voters expressed anger at the economy, mostly because average prices are still about 20% higher than they were four years ago. Former President Donald Trump placed the blame largely on the Biden-Harris administration’s energy policies, promising that inflation would “just go away” if he was elected. Vice President Kamala Harris has promised to ban grocery store price gouging and lower child care and health care costs.
Economists say Trump’s policies will actually worsen inflation, mainly because of his plans to impose sweeping new tariffs and initiate mass deportations of immigrants and other migrants. Experts say Harris’s proposals on price gouging will have little impact in the short term.
Thursday’s report also showed that Americans remain confident enough in their finances to keep shopping: Spending jumped 0.5% in the August-September period, helping the economy expand at a good pace in the July-September quarter.
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The government said income rose more slowly last month, rising by just 0.3%. In response, Americans reduced their savings, leaving the savings rate at 4.6%, down from 4.8% the previous month.
Inflation peaked at 7.1% in June 2022 after the economy accelerated out of the pandemic recession at a time of severe shortages of parts and labor, according to the measure released Thursday, called the Personal Consumption Expenditures Price Index. Inflation has slowed steadily over the past two years after supply chains recovered from pandemic disruptions and the Federal Reserve raised its key interest rate to the highest level in four decades, dragging down home sales and car purchases.
The Fed is inclined to favor the measure of inflation the government released Thursday — the Personal Consumption Expenditures Price Index — over the more well-known Consumer Price Index. The Personal Consumption Expenditures Index attempts to take into account changes in how people shop when inflation jumps. It can, for example, record when consumers switch from pricier national brands to cheaper store brands.
In general, the PCE index tends to show a lower rate of inflation than the CPI. That’s partly because rents, which have been high, carry twice the CPI weight as they did in the index released Friday.
Chairman Jerome Powell indicated in late August that the Fed was increasingly confident that inflation was under control. Employment weakened in July and August. These trends prompted the Federal Reserve to cut its key interest rate by half a percentage point last month. As inflation continues to slow, the Fed is expected to cut interest rates by a quarter of a percentage point in November and likely by another quarter of a point in December.
However, expectations for future interest rate cuts are not entirely clear. Hiring rebounded sharply in September, and the unemployment rate fell to a low of 4.1%, evidence that the labor market may be stronger than it appeared last summer. Retail sales also rose last month. On Wednesday, the government estimated that the economy expanded at an annual rate of 2.8% in the July-September quarter, a strong pace, fueled by strong consumer spending.
The upbeat economic data has sparked some speculation that the Fed may decide to skip a rate cut in December or cut interest rates more slowly next year.
On Friday, the government will release its last major economic data before the presidential election: the October jobs report. This is likely to present a more mixed-than-usual picture of the labor market, because Hurricanes Helen and Milton are believed to have caused tens of thousands of workers to lose their jobs, at least temporarily.
& Edition 2024 The Canadian Press
