Inflation Cooled, Paving the Way for Lower Borrowing Costs

Inflation Report Highlights Positive Developments

Americans and Federal Reserve officials have news to celebrate: Inflation cooled significantly last month, likely giving central bankers more confidence to continue cutting interest rates. The Fed’s favorite inflation gauge, the Personal Consumption Expenditures price index, showed consumers paid 2.2% more for goods and services for the year ended in August, versus 2.5% in July.

Current Inflation Trends

This marks another step closer toward the Fed’s 2% inflation target, as well as the lowest inflation rate seen since February 2021, when inflation clocked in at 1.9%. The annual increase was below the 2.3% rate economists projected, according to FactSet consensus estimates.

• On a monthly basis, prices rose 0.1% in August versus the 0.2% increase in July, matching estimates.
• However, “core” inflation, which strips out volatile food and energy prices, rose last month to an annual pace of 2.7%.

Potential Rate Cuts Ahead

The progress seen in recent months—with inflation getting closer to 2% and cooling labor market conditions—pushed central bankers to cut rates by an unusually large half-point earlier this month instead of the more traditional quarter-point move. Friday’s inflation report signals that another big cut may be on its way to help alleviate borrowing costs for Americans.

However, concerns linger among officials about the potential consequences of larger cuts. Fed Governor Michelle Bowman, expressing hesitations, noted that even though the inflation report is a welcome sign, it may not be sufficient for her to support further significant cuts at the November meeting.

Implications for Future Economic Conditions

Meanwhile, Fed Governor Christopher Waller pointed to the slowing Producer Price Index as a favorable indication for voting on larger cuts. The PPI report showed wholesale prices markedly slowed in August to a rate of 1.7% from an annual increase of 2.1%. This data is generally seen as a precursor to expected consumer prices.

This is a developing story and will be updated as events unfold.