A key inflation indicator in the US shows prices cooled in August, raising the possibility of further interest rate cuts

The Fed’s preferred measure of inflation on Friday provided the latest sign that price pressures are easing; This trend is expected to lead to further interest rate cuts by the Fed this year and next year.

Prices increased by only 0.1 percent in the July-August period. Ministry of Commerce saidIt increased by 0.2% compared to the previous month. Compared with a year ago, inflation fell to 2.2% from 2.5% in July, slightly above the Fed’s 2% inflation target.

Cooling inflation may be eroding former President Donald Trump’s poll advantage on the economy. Respondents in a poll conducted last week by The Associated Press-NORC Center for Public Affairs Research were almost evenly split on whether Trump or Vice President Kamala Harris would do a better job on the economy. That’s a significant shift from when President Joe Biden was still in the race, when nearly six in 10 Americans disapproved of his handling of the economy. This shift suggests that Harris may be able to offload some of Biden’s burden on the economy as sentiment among consumers begins to improve.

Grocery costs rose marginally last month and energy costs fell 0.8%, buoyed by cheaper gasoline, according to Friday’s report.

Excluding variable food and energy costs, so-called core prices rose only 0.1% in July-August; This fell short of the 0.2% increase in the previous month. This was the fourth consecutive time that monthly price increases fell below the Fed’s target of 2% annually. Compared to 12 months ago, core prices increased by 2.7% in August, slightly higher than in July.

“Sticky inflation is yesterday’s problem,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a research note.

With inflation falling from its peak in 2022 to just above the Fed’s 2% target, the central bank cut its benchmark interest rate by an unusually large half-point last week; This was a dramatic change after more than two years of high rates. Policymakers have also signaled that they expect to cut interest rates by another half point in November and December. And they predict four more interest rate cuts in 2025 and two in 2026.

The continued decline in inflation makes it more likely that the Fed will further cut its key benchmark interest rate in the coming months.

“From the Fed’s perspective, cumulatively, we think the data shows sufficient progress in key inflation measures for policymakers to continue lowering interest rates,” said chief economist Carl B. Weinberg; and Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a research note published Friday. “Softer-than-expected nominal spending and income results encourage them to continue expansion.”

On Thursday, Tom Barkin, president of the Federal Reserve Bank of Richmond, expressed support for a cautious approach to interest rate cuts. In an interview with The Associated Press, he said he was in favor of the Fed lowering the interest rate “somewhat.” But Barkin said he wanted to make sure inflation continued to cool before cutting the benchmark interest rate to a level that would no longer constrain the economy.

Lukewarm consumer spending

Friday’s report also showed that Americans’ income and spending rose only slightly last month, with both rising just 0.2%. Still, these modest increases dovetail with upward revisions this week to last year’s revenue and spending figures. These revisions showed that consumers, on average, were in better financial shape than previously reported.

“Consumer spending was slightly softer than expected, mostly due to relatively weak goods spending,” said Olu Sonola, head of U.S. economic research at Fitch Ratings. “All things considered, this month’s report does not lead the Fed to another strong 50 basis point cut in November. Two 25 basis point cuts in November and December still look more likely.”

Americans have saved more of their income in recent months, the revisions show, and the savings rate remained at 4.8% in September, after previous figures showed it fell below 3%.

The government reported on Thursday that the economy grew at a healthy 3% annual rate in the April-June quarter. And he said economic growth was higher than previously forecast for much of the period from 2018 to 2023.

The Fed tends to prefer the inflation gauge the government released on Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index attempts to account for changes in the way people shop when inflation increases. For example, it can capture situations where consumers switch from more expensive national brands to cheaper store brands.

In general, the PCE index tends to show a lower inflation rate than the CPI. This is partly because high rents carry twice as much weight in the CPI as in the index released on Friday.

Recent reports show that the economy is still growing at a healthy pace. The government on Thursday confirmed its earlier forecast that the U.S. economy reached a healthy 3% annual growth rate from April through June, fueled by strong consumer spending and business investment.

Some individual barometers of the economy are also reassuring. The number of Americans applying for unemployment benefits fell to the lowest level in four months last week.

Last month, Americans increased their spending at retailers; This shows that consumers are still able and willing to spend more despite the cumulative impact of three years of hyperinflation and high debt rates.

of the nation industrial production recoveredmore. speed detached house construction up sharply from the pace a year ago. And this month, consumer confidence rose for the third month in a row, preliminary figures show University of Michigan. The brighter outlook resulted from “more affordable prices perceived by consumers” for cars, appliances, furniture and other long-lasting products.