U.S. Inflation Moderates, But Core Prices and Shelter Costs Remain Stubborn

The U.S. inflation rate rose 0.2% in August, matching both July’s increase and economists’ predictions. On a core basis, which excludes volatile food and gas prices, inflation climbed by 0.3% from the prior month and 3.2% compared to last year. While inflation is cooling, it remains above the Federal Reserve’s 2% annual target, raising questions about the Fed’s next steps on interest rates.

U.S. inflation print expected to tee up first Fed interest rate cut this month pic.twitter.com/vjcJyS8Jra

— Jaz Grewal (@jazmortgage) September 11, 2024

Fed Chair Jerome Powell had previously indicated that a rate cut was likely during the Fed’s upcoming meeting on September 18. Recent economic data, including a weaker-than-expected jobs report, has reinforced this expectation. However, the higher-than-expected core inflation reading has made the timing and size of the cut more uncertain.

Economists like Seema Shah of Principal Asset Management have noted that while inflation data complicates the possibility of a larger rate cut, it isn’t likely to halt the Fed’s plans entirely. Market odds for a 25-basis-point cut now outweigh those for a 50-basis-point reduction, with most analysts leaning toward a smaller cut.

Shelter costs, which include rent and homeowners’ equivalent rent, have been a key factor in keeping inflation elevated. The shelter index increased 5.2% annually in August and 0.5% month over month. Rent and owners’ equivalent rent both rose slightly, and the index for lodging away from home jumped 1.8%. Meanwhile, energy prices dropped 0.8% in August, and gas prices fell by 0.6%. On an annual basis, energy costs have decreased by 4%.

FTSE 100 drops on Rentokil warning; U.S. inflation data weighs https://t.co/qE4wFMzLqW pic.twitter.com/pKUqHvIQmV

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Other areas with price increases over the last year include motor vehicle insurance (16.5%), medical care (3%), and education (3.1%). However, used cars and trucks, household furnishings, and communication services saw price declines in August, offering some relief for consumers.

As the Fed prepares for its upcoming decision, Powell has emphasized that progress on inflation has been sufficient to begin cutting rates. However, with persistent inflation in areas like shelter and food, the path to lower rates may still require caution.

Key Points:

i. U.S. inflation rose 0.2% in August, with core inflation climbing 0.3%.

ii. Despite moderating inflation, core prices remain above the Federal Reserve’s 2% target, complicating the potential for larger rate cuts.

iii. Shelter costs, a significant driver of inflation, increased 5.2% annually and 0.5% month-over-month in August.

iv. Gas prices and energy costs decreased, but other categories like motor vehicle insurance and education saw price increases.

v. The Federal Reserve is expected to implement a 25-basis-point rate cut, with a decision anticipated at its September meeting.

Conner T – Reprinted with permission of Whatfinger News