US inflation reaches lowest point in 3 years, though some price pressures remain

Inflation in the United States dropped last month to its lowest point since it began surging more than three years ago. Consumer prices rose just 2.4% in September from a year earlier, down from 2.5% in August, marking the smallest annual rise since February 2021. Measured from month to month, prices increased by 0.2% from August to September, the same as in the previous month.

However, when excluding volatile food and energy costs, “core” prices, which are a gauge of underlying inflation, remained elevated in September. This rise was driven by increasing costs for medical care, clothing, auto insurance, and airline fares. Core prices in September were up 3.3% from a year earlier and 0.3% from August.

Economists closely monitor core prices as they tend to provide a better indication of future inflation trends.

Alan Detmeister, an economist at UBS Investment Bank, suggested that some items contributing to higher core inflation, particularly used cars, may see price increases again in the coming months, keeping overall prices elevated. On the other hand, prices for more volatile items such as clothing and airfares are expected to cool soon.

“Things are still gradually coming down, but there is going to be volatility month to month,” said Detmeister, who previously worked for the Federal Reserve.

The September inflation figures indicate a gradual easing back toward the Fed’s 2% target, albeit through an uneven pattern. This decline suggests that the Federal Reserve may continue to cut its benchmark interest rate this year, with most economists anticipating quarter-point reductions in November and December.

On a positive note, apartment rental prices grew at a slower pace last month, signaling that housing inflation may finally be cooling. This is a much-anticipated development that could offer relief to many consumers. Omair Sharif, founder of Inflation Insights, expressed optimism, stating that measures of new rents show a steady slowdown, suggesting that government gauges of rent should continue to ease over time.

“I think we’re on the right path here,” Sharif commented. “We should see rent cool off quite a bit.”

Overall inflation last month was kept in check due to a significant drop in gas prices, which fell by 4.1% from August to September. Grocery prices increased by 0.4% last month, following a year of mild increases, and are only 1.3% higher compared to a year ago. However, food prices have surged nearly 25% from pre-pandemic levels, significantly affecting many Americans’ budgets and becoming a focal point in the presidential campaign.

Notably, Republican candidate Donald Trump often discusses the rising cost of bacon, which experienced a peak increase of 30%, reaching $7.60 a pound in October 2022 but has recently fallen to $6.95, though still at an elevated level. Additionally, restaurant food prices increased by 0.3% last month, totaling a 3.9% rise over the past year. Clothing prices rose by 1.1% from August to September and are up 1.8% compared to the previous year.

The improving inflation scenario follows a generally positive jobs report released recently, showing that hiring accelerated in September and the unemployment rate decreased from 4.2% to 4.1%. The government also reported a solid economic expansion at a 3% annual rate in the April-June quarter, with growth likely continuing at a similar pace in the recently completed July-September quarter.

A cooling inflation rate, robust hiring, and healthy economic growth might diminish Trump’s competitive edge regarding economic issues in the presidential campaign, especially as Vice President Kamala Harris has recently caught up with him in public opinion polls concerning who would better handle the economy.

Nevertheless, most voters continue to rate the economy poorly, largely due to the cumulative rise in prices over the past three years.

For the Federal Reserve, the recent unexpectedly strong jobs report raised some concerns that the economy may not be cooling enough to sufficiently slow inflation. The central bank recently reduced its key rate by a notable half-point, marking its first rate cut in four years, with policymakers indicating they foresee two additional quarter-point reductions in November and December.

In recent remarks, several Federal Reserve officials expressed their willingness to continue cutting their key rate but at a careful pace, indicating that further half-point cuts are unlikely. Lorie Logan, president of the Federal Reserve’s Dallas branch, stated that the Fed “should not rush to reduce” its benchmark rate “but rather should proceed gradually.”

Following the economic recovery from the pandemic, inflation has surged in the United States, along with many other countries in Europe and Latin America, as disruptions from COVID-19 created supply chain issues. The onset of Russia’s invasion of Ukraine exacerbated energy and food shortages, leading to higher inflation rates, which peaked at 9.1% in the U.S. in June 2022.

Economists at Goldman Sachs have projected that core inflation will drop to 3% by December 2024, with few analysts expecting another surge in inflation unless conflicts in the Middle East escalate dramatically.