Inflation is cooling and the Fed is likely to cut rates in September. (iStock)
Annual inflation continued to climb toward 2% in August, the inflation target set by the Federal Reserve, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
On an annual basis, prices rose 2.5% in August, the smallest 12-month increase since February 2021. This is a slowdown from the previous month’s 2.9% growth. On a monthly basis, prices increased by 0.2%, the same increase as in July. Core inflation, which excludes more volatile food and energy prices, rose 3.2% in August and rose 0.3% monthly, after rising 0.2% the previous month.
The driving force behind the decline in inflation has been a decline in energy costs over the past year and a marked slowdown in the pace of food price increases. On the other hand, housing inflation weighed heavily on consumer spending and was the biggest driver, rising 0.5% in August. However, on an annual basis, shelter inflation rose 5.2%, significantly lower than the peak of 8.2% in March 2023.
“Today’s data is one of the last major data checkpoints heading into the September Fed meeting and decision,” said Danielle Hale, chief economist at Realtor.com. “It provides crucial clues about the likely size of the Fed’s September rate cut, which is widely believed to be a given at this point. In my view, the continued decline in inflation in August strengthens the path for a rate cut in September. Mixed headlines and key CPI figures open the door to a lively debate on whether a quarter or half point cut will be appropriate.”
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A quarter of a half point lead?
The August decline marks several months of consistent declines since March and bodes well for the narrative that the Federal Reserve could finally be ready to cut rates at its meeting next week. However, it is unclear whether the rate cut will be as deep as some economists have predicted.
The U.S. Bureau of Labor Statistics recently reported that the U.S. created 818,000 fewer jobs over the past 12 months (through March) than it previously forecast. The unexpectedly weak job creation data had prompted calls for a cut of at least half a point, but a 50 basis point rate cut could now be seen as an admission by the Fed that it waited too long to get going, said Jim Baird of Plante Moran Financial. Advisor Chief Investment Officer.
“Standing on rate policy is important for the Fed, but so is controlling the narrative and maintaining the central bank’s credibility,” Baird said. “With that in mind, there is nothing in the August inflation report that is likely to cause policymakers to stray from the measured quarter-percent reduction they have been seeking for some time.”
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Correction in the housing market is underway
Mortgage rates have continued to fall on expectations of rate cuts resulting from the upcoming Fed meetings, but first-time homebuyers in particular continued to face the challenge of high home prices.
A Fed rate cut should further improve mortgage rates and housing inventory continues to increase, according to a report from Realtor.com. The number of homes actively for sale increased by 35.8% in August and is now at the highest level since May 2020. In addition, the share of affordable homes priced between €200,000 and €350,000 continues to increase.
Democratic presidential candidate Kamala Harris has proposed offering up to $25,000 in down payments to first-time homebuyers.
“Many southern markets have seen significant inventory build-ups, easing some of the pricing pressure, while hot markets in the Midwest and Northeast continue to see strong demand and price growth,” said Hannah Jones, Senior Economic Research Analyst for Realtor.com. ‘The market is particularly difficult for starters on the housing market, who do not have the advantage that the existing equity in a home can be used to purchase a house. Presidential candidate Kamala Harris has proposed a plan to help first-time buyers with a down payment. can have a major impact and in some markets can even cover an entire down payment.”
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