Inflation is slowing and the Fed is likely to cut interest rates in September. (iStock)
Annual inflation continued to rise slowly in August toward the 2% target rate set by the Federal Reserve. Consumer Price Index The Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
Prices rose 2.5% year-on-year in August, the slowest 12-month increase since February 2021. That slowed from a 2.9% increase in the previous month. Monthly prices rose 0.2%, the same rate as in July. Core inflation, which excludes more volatile food and energy prices, rose 3.2%, increasing 0.3% monthly in August after a 0.2% increase in the previous month.
The decline in inflation was driven by lower energy costs over the past year and a notable slowdown in the pace of food price increases. Meanwhile, housing inflation, which heavily influences consumer spending, was the largest contributor, rising 0.5% in August. On an annual basis, however, housing inflation rose 5.2%, down significantly from a peak of 8.2% in March 2023.
“Today's data is one of the last major data checkpoints leading up to the September Fed meeting and decision,” said Daniel Hale, chief economist at Realtor.com. “The data holds important clues about the size of the Fed's rate cut in September, which is widely considered a given at this point. In my view, the continued decline in inflation in August solidifies the path for a September rate cut. Mixed headline and core CPI numbers will likely spark lively debate over whether a quarter or a half point cut is appropriate.”
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Did you cut a quarter of a half point?
The August cut marks the first in several months since March and supports the notion that the Federal Reserve may finally cut rates when it meets next week, though it's unclear whether the cut will be as big as some economists had expected.
of The U.S. Bureau of Labor Statistics recently U.S. job creation over the trailing 12 months (through March) was 818,000 fewer than previously expected. The unexpectedly weak job creation data had prompted calls for at least a half-point rate cut, but a 50-basis-point cut now could be seen as an admission that the Fed waited too long to get started, according to Jim Baird, chief investment officer at Plante Moran Financial Advisors.
“While it is important for the Fed to execute interest rate policy steadily, it is equally important that it control the narrative and maintain the central bank's credibility,” Baird said. “With that in mind, the August inflation report contained nothing that would move policymakers away from the cautious quarter-point cut that has been guiding expectations for some time.”
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Housing market correction underway
Mortgage rates continue to fall on hopes of rate cuts at upcoming Fed meetings, but first-time homebuyers, in particular, continue to face the challenge of rising home prices.
According to Realtor.com, the Fed's rate cuts should further improve mortgage borrowing rates and keep housing inventory growing. ReportThe number of homes for sale increased 35.8% in August, the highest since May 2020. Additionally, the proportion of affordable homes in the $200,000 to $350,000 price range continues to increase.
Democratic presidential candidate Kamala Harris has proposed offering first-time homebuyers up to $25,000 in down payment assistance.
“Many Southern markets have seen significant inventory increases, easing some of the pressure on prices, while popular Midwest and Northeast markets are seeing strong demand and prices continue to rise,” said Hannah Jones, senior economic research analyst at Realtor.com. “The market is especially tough for first-time homebuyers who don't have the advantage of existing home equity to leverage toward a home purchase. Presidential candidate Kamala Harris has proposed a plan to provide down payment assistance to first-time homebuyers, which could go a long way and potentially cover the entire down payment in some markets.”
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