As the presidential race influenced significantly by American concerns about high prices draws to a close, the government announced on Thursday that an inflation measure closely monitored by the Federal Reserve has decreased to levels approaching those seen before the pandemic.
The Commerce Department reported that prices increased by 2.1% in September compared to a year earlier, a decline from the 2.3% increase recorded in August. This level is slightly above the Federal Reserve’s 2% inflation target, aligning with figures from 2018, before prices began to surge following the pandemic recession.
However, certain indicators of inflation pressure persist. When excluding volatile food and energy costs, core prices rose by 2.7% in September compared to the previous year, maintaining the same rate for three consecutive months. Month-over-month, core prices increased by 0.3% from August to September, up from the 0.2% rise from July to August, which exceeds the preferred rate of the Federal Reserve.
Over the last six months, core inflation has decreased to an annual rate of 2.3%, down from 2.5% in August. Economists still anticipate that the Federal Reserve will reduce its key rate by a quarter-point at its upcoming meeting.
Gregory Daco, chief economist at the tax and accounting firm EY, described the situation as an “essentially soft landing,” where high interest rates control inflation without triggering a recession. This scenario is characterized by enduring consumer spending growth and inflation nearing the Federal Reserve’s 2% target.
Additionally, the employment cost index, a separate measure of worker pay issued by the government, indicated that wages and benefits grew by only 0.8% in the July-September quarter, marking the slowest pace in three years. Compared to the same quarter the previous year, workers’ paychecks, excluding government employees, rose by 3.8%, a rate consistent with the Federal Reserve’s inflation target, according to Daco.
While faster wage growth benefits workers, it can potentially fuel inflation if companies transfer higher labor costs to consumers through increased prices.
The latest indicators of sustained inflation cooling emerge just five days before an election where many voters are dissatisfied with the economy, primarily due to average prices being nearly 20% higher than four years ago. Former President Donald Trump has largely attributed the situation to the Biden-Harris administration’s energy policies and pledged that inflation would “vanish completely” if elected. Vice President Kamala Harris has vowed to eliminate price gouging for groceries and reduce child care and health care costs.
Economists suggest that Trump’s policies could exacerbate inflation, mainly due to plans for new tariffs and mass deportations of migrants and immigrants. Harris’ proposals to combat price gouging are expected to have minimal short-term impact, according to experts.
The report also indicated that Americans continue to feel secure enough in their financial standing to sustain spending, with an increase of 0.5% from August to September, which contributed to healthy economic growth in the July-September quarter.
Last month, income growth slowed, increasing by only 0.3%. Consequently, Americans reduced their savings, resulting in a savings rate of 4.6%, down from 4.8% the previous month.
On a month-to-month basis, prices saw a 0.2% increase from August to September, up slightly from a 0.1% increase from July to August.
Inflation reached its peak at 7.1% in June 2022 after the economy rebounded from the pandemic recession amidst severe shortages of parts and labor, according to the personal consumption expenditures (PCE) price index released on Thursday. Over the past two years, inflation has gradually tapered as supply chains recovered from pandemic disruptions and the Federal Reserve raised its key interest rate to a four-decade high, impacting home sales and auto purchases.
The Federal Reserve generally prefers the PCE price index to the more well-known consumer price index (CPI), as it adjusts for changes in consumer shopping behavior when prices increase, capturing shifts such as consumers opting for less expensive store brands over national brands.
Typically, the PCE index reports lower inflation rates compared to CPI, partly because rents have greater weight in the CPI.
Federal Reserve Chair Jerome Powell indicated in late August that there is growing confidence within the Fed that inflation is being controlled. Hiring activity diminished in July and August, contributing to the Fed’s decision to cut its key rate by a significant half-point last month. With inflation continuing to decrease, it is expected that the Fed will further reduce its rate by a quarter-point in November and potentially again in December.
However, the unpredictability of future rate cuts persists. A sharp increase in hiring was observed in September, lowering the unemployment rate to 4.1%, which suggests that the job market might be more robust than previously perceived. Retail sales also saw an uptick last month, and the government estimated that the economy grew at a 2.8% annual rate in the July-September quarter, a steady pace propelled by strong consumer spending.
The positive economic data has led to speculation that the Fed may forego a December rate reduction or adopt a more gradual approach to cutting rates next year.
The government is set to release its final major economic data before the presidential election on Friday: the October jobs report. This report is anticipated to offer a more varied perspective of the labor market, as Hurricanes Helene and Milton are believed to have temporarily displaced tens of thousands of workers.
