US inflation hits 3-year low as Federal Reserve prepares to cut interest rates

WASHINGTON — The surge in U.S. inflation following the pandemic eased further last month, with year-over-year price growth hitting a three-year low, setting the Federal Reserve up for a rate cut next week.

Wednesday’s Labor Department report showed consumer prices rose 2.5% in August from a year earlier, down from 2.9% in July. It was the fifth consecutive annual decline and the smallest such increase since February 2021. Prices rose just 0.2% from July to August.

Excluding volatile food and energy costs, so-called core prices rose 3.2% in August from a year earlier, the same as in July. On a monthly basis, core prices rose 0.3% last month, up slightly from July’s 0.2% rise. Economists closely watch core prices, which tend to provide a better read on future inflation trends.

For months, lower inflation has provided gradual relief to American consumers who were battered by the price spikes that began three years ago, particularly for food, gasoline, rent and other necessities. Inflation peaked in mid-2022 at 9.1%, the highest in four decades.

A key reason for the fall in overall inflation last month was the third drop in gasoline prices in four months: average gasoline prices fell 0.6% from July to August and are down 10.6% from a year earlier. Used cars fell 1% last month. Measured against a year earlier, used-car prices fell 10.4%.

Grocery prices were unchanged from July to August, extending a cooling period for food costs, even though they remain much higher than they were three years ago. Grocery prices have risen just 0.9% over the past year, similar to the pre-pandemic pace of food inflation.

Federal Reserve officials have signaled that they are increasingly confident that inflation is falling toward their 2% goal and are now shifting their focus to supporting a labor market that has been cooling. As a result, policymakers are poised to begin cutting their benchmark interest rate from its 23-year high in hopes of bolstering growth and hiring.

A modest quarter-point cut is widely expected next week. Over time, the series of rate cuts should lower the cost of borrowing across the economy, including mortgages, auto loans and credit cards.

The latest inflation data could weigh on the presidential race in its final weeks. Former President Donald Trump blamed Vice President Kamala Harris for the spike in inflation that erupted in early 2021 as global supply chains collapsed, causing severe shortages of parts and labor. Harris has proposed subsidies for homebuyers and builders to help lower housing costs and supports a federal ban on price gouging on groceries. Trump has said he would boost energy production to try to reduce overall inflation.

Still, rent and housing costs rose faster from July to August than in the previous month, a key driver of the rise in core inflation. Fed officials, who closely monitor housing costs, expect them to fall more consistently in the coming months.

The median rent for a new lease rose just 0.9% in August from a year earlier, to $1,645 a month, according to real estate brokerage Redfin. But the government measure includes all rents, including those for people who have lived in their apartments for months or years. It takes time for a slowdown in new rentals to show up in government data. Last month, rent costs rose 5.2% from a year earlier, according to the government’s Consumer Price Index.

Americans’ wages are also rising more slowly — about 3.5% a year on average, still a solid pace — which is easing inflationary pressures. Two years ago, wage growth was above 5%, a level that can force companies to raise prices sharply to cover higher labor costs.

In a high-profile speech last month, Federal Reserve Chairman Jerome Powell noted that inflation was coming under control and suggested that the labor market was unlikely to be a source of inflationary pressure.

Consumers have been a driving force in the economy for the past three years. But they are increasingly turning to debt to support spending and credit cards, and car arrears are mounting, raising fears they will soon have to cut spending. Reduced consumer spending could lead to more employers freezing hiring or even cutting jobs.