US inflation reaches lowest point in 3 years, though some price pressures remain

WASHINGTON — Inflation in the United States dropped last month to its lowest point since it began surging more than three years ago.

Consumer prices rose just 2.4% in September from a year earlier, down from 2.5% in August, and the smallest annual rise since February 2021. Measured from month to month, prices increased 0.2% from August to September, the Labor Department reported Thursday, the same as in the previous month.

Excluding volatile food and energy costs, however, "core" prices, a gauge of underlying inflation, remained elevated in September, driven up by rising costs for medical care, clothing, auto insurance and airline fares. Core prices in September were up 3.3% from a year earlier and 0.3% from August.

Economists closely watch core prices, which typically provide a better hint of future inflation.

Alan Detmeister, an economist at UBS Investment Bank, suggested some items that contributed to higher core inflation last month, notably used cars, could rise again in the coming months, keeping prices a bit elevated.

Other items that rose in price in September, like clothing and airfares, are more volatile and should cool soon.

"Things are still gradually coming down, but there is going to be volatility month to month," said Detmeister, a former Federal Reserve economist.

Taken as a whole, the September figures show that inflation is steadily easing back to the Fed's 2% target, even if in an uneven pattern. That decline suggests the Fed will likely keep cutting its benchmark interest rate this year, with most economists expecting quarter-point reductions in November and December.

On a positive note, apartment rental prices grew more slowly last month, a sign that housing inflation is finally cooling, a long-awaited development that would provide relief to many consumers.

Omair Sharif, founder of Inflation Insights, said measures of new rents show a steady slowdown, suggesting the government's gauges of rent should continue to ease over time.

"I think we're on the right path here," Sharif said. "We should see rent cool off quite a bit."

Overall inflation last month was held down by a big drop in gas prices, which fell 4.1% from August to September. Grocery prices jumped 0.4% last month, after about a year of mild increases, though they're just 1.3% higher than a year earlier.

Still, food prices are up almost 25% from pre-pandemic levels, which has hammered many Americans' budgets and taken on a high profile in the presidential campaign.

Republican candidate Donald Trump often cites the cost of bacon, which soared 30% to a peak of $7.60 a pound in October 2022, as an example of big increases in the cost of living. Bacon prices have since fallen to $6.95 but are still elevated.

Restaurant food prices increased 0.3% last month and are up 3.9% in the past year. Clothing prices rose 1.1% from August to September and are up 1.8% from a year ago.

The improving inflation picture follows a mostly healthy jobs report released last week, which showed hiring accelerated in September and that the unemployment rate dropped from 4.2% to 4.1%.

The government also reported that the economy expanded at a solid 3% annual rate in the April-June quarter. Growth likely continued at about that pace in the just-completed July-September quarter.

Cooling inflation, solid hiring and healthy growth could erode Trump's advantage on the economy in the presidential campaign as measured by public opinion polls. In some surveys, Vice President Kamala Harris has pulled even with Trump on the issue of who would best handle the economy, after Trump decisively led President Joe Biden on the issue.

At the same time, most voters still give the economy relatively poor marks, mostly because of the cumulative rise in prices over the past three years.

For the Fed, last week's much-stronger-than-expected jobs report fueled some concern that the economy might not be cooling enough to slow inflation sufficiently. The central bank reduced its key rate by an outsized half-point last month, its first rate cut of any size in four years. The Fed's policymakers also signaled they envision two additional quarter-point rate cuts in November and December.

In remarks this week, a slew of Fed officials said they're still willing to keep cutting their key rate but at a deliberate pace, a signal that any further half-point cuts are unlikely.

The Fed "should not rush to reduce" its benchmark rate "but rather should proceed gradually," said Lorie Logan president of the Federal Reserve's Dallas branch.

Inflation in the United States and many countries in Europe and Latin America surged in the economic recovery from the pandemic, as COVID closed factories and clogged supply chains. Russia's invasion of Ukraine worsened energy and food shortages, pushing inflation higher. It peaked at 9.1% in the U.S. in June 2022.

Economists at Goldman Sachs projected this week that core inflation will drop to 3% by December 2024. Few analysts expect inflation to surge again unless conflicts in the Middle East worsen dramatically.