By Tilly Armstrong Assistant Consumer Editor for Dailymail.Com
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Consumer prices rose 2.5 percent in August from a year earlier, according to new data released Wednesday by the Bureau of Labor Statistics.
This clears the way for the Federal Reserve to cut interest rates at its next meeting on September 18, bringing key borrowing costs down from a 23-year high and providing some relief to households.
After an aggressive rate hike campaign, interest rates have been hovering between 5.25 and 5.5 percent since July 2023.
The Fed has not cut rates since the start of the Covid-19 pandemic in 2020.
After August’s inflation figures, investors are now predicting the central bank will cut rates by a quarter of a percentage point next week, rather than the rarer half-percentage-point cut.
An interest rate cut is good news for consumers because it reduces credit card and car loan rates and lowers mortgage payments.
How will the Fed respond?
The Federal Reserve is expected to cut interest rates at its next meeting on Sept. 18, bringing key borrowing costs down from a 23-year high and providing some relief to households.
After an aggressive rate hike campaign, interest rates have been hovering between 5.25 and 5.5 percent since July 2023.
The Fed has not cut rates since the start of the Covid-19 pandemic in 2020.
Investors are now predicting that the central bank will cut interest rates by a quarter of a percentage point next week, instead of the usual half-percentage point cut.
An interest rate cut is good news for consumers because it reduces credit card and car loan rates and lowers mortgage payments.
According to the CME FedWatch tool, the probability of a larger-than-normal rate cut now stands at around 15 percent, down from 34 percent on Tuesday.
Experts say core inflation is higher than expected and the central bank is likely to be more cautious.
“With core inflation coming in higher than expected, it has become harder for the Fed to cut rates by 50 basis points,” said Seema Shah, Chief Global Strategist at Principal Asset Management.
‘The figure certainly doesn’t preclude policy action next week, but hawks on the committee are likely to seize today’s CPI report as evidence that the final stretch of inflation needs to be managed with care and caution – a good reason to move to a 25 basis point cut.’
How will lower interest rates affect your finances?
Credit card rates move in line with the Fed’s benchmark numbers, so this would mean a quick cut and provide some relief to borrowers.
Mortgage rates are already falling, averaging 6.35 percent for a 30-year fixed-rate mortgage, according to the most recent data from Freddie Mac as of September 5.
Benchmark borrowing costs do not directly affect mortgage rates, but mortgage loans do track the yield on 10-year government bonds.
The bonds are affected by several factors, including inflation forecasts, Fed actions and investor reactions to them.
This means that mortgage costs will fall when banks expect interest rate cuts to occur in the future.
High mortgage rates have been an obstacle for home buyers for a number of years, as have high house prices and the shortage of houses for sale.
Falling mortgage rates would provide an incentive for people looking to refinance their mortgages or buy a home, and experts hope this will get the housing market moving again.
Food price rise muted – but egg prices rise
Food price inflation continued to decline last month, which is encouraging news for consumers fed up with high prices.
Overall, food prices rose 0.1 percent in the month, down from a 0.2 percent increase in July.
On an annual basis, food prices rose 2.1 percent through August, down from 2.2 percent in the previous month.
Fruit and vegetable prices fell 0.2 percent month-on-month, but other basic products rose.
For example, the price of eggs rose by 4.8 percent compared to July, the largest increase of all products in the index.
While food inflation is slowing, many Americans still struggle with food prices at the grocery store.
According to data from the Ministry of Labor, food prices have risen by 20 percent over the past five years.
Living in the spotlight
While annual inflation eased in August, the monthly ‘core price index’ was higher than expected.
This measure, which excludes fluctuating food and energy prices, rose 0.3 percent, largely due to house prices.
The housing market in particular continues to struggle with inflation, even though other prices have now fallen.
Housing costs accounted for more than 70 percent of the year-on-year increase in core prices.
Stocks fall after data release
U.S. stocks fell on Wednesday morning after Wall Street digested the latest consumer inflation report.
The Dow Jones Industrial Average fell nearly 0.6 percent, the S&P 500 fell about 0.4 percent and the Nasdaq lost about 0.4 percent.
Investors are eagerly awaiting inflation numbers to determine how far the Federal Reserve will cut interest rates next week.
Inflation slows in August
New figures from the US Bureau of Labor Statistics show prices rose 2.5 percent in the year through August.
This is lower than economists’ expectations, who had predicted a price increase of 2.6 percent. It is also the lowest annual inflation figure since February 2021.
The consumer price index rose by 0.2 percent in the month, the same percentage as in July.
Core prices, excluding food and energy, rose 0.3 percent from July and 3.2 percent from a year ago.
This was slightly higher than expected, mainly due to an increase in housing costs.
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