US inflation rate slows as Federal Reserve prepares to lower interest rates

The consumer price index, the top measure for inflation in the U.S., slowed in August to 2.5% in the 12-month period ending in August, according to the Bureau of Labor Statistics who released the updated consumer price index on Wednesday.

The new data shows that inflation is now below recent norms. In the last decade, prices generally increase at a rate of 3.2% per year. In the last 20 years, consumer inflation has generally increased 3% annually.

The consumer price index weighs the costs of goods based on their importance. Items like food, shelter and energy tend to be weighted more heavily.

After annual inflation reached 9% in the middle of 2022, the Federal Reserve implemented a series of interest rate hikes in 2022 and 2023 to combat high inflation. Federal Reserve Chair Jerome Powell has stated the Federal Reserve's goal is to reduce inflation to an annualized rate of 2%.

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The federal interest rate has climbed to a 23-year high and has remained there since last August.

The Federal Reserve surprised some at its late July meeting by not dropping rates. Interest rates have remained at their highest levels since early 2001 for the last 13 months — between 5.25% and 5.5%.

With wages outpacing the inflation rate, Americans are regaining some of the buying power lost in 2022.

Average hourly wages increased 14 cents in August to $35.21. Workers are making an average of $1.30 an hour more than a year ago. Average weekly wages were $1,207 in August, up from $1,168 a year ago, marking a 3.5% increase in wages.

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Slowing inflation has been helped by a drop in energy prices. U.S. consumers are spending 4% less this year than in August 2023 on energy, according to the August 2024 consumer price index.

Grocery prices also aren't increasing as much as they have in the past. Prices for food meant to be consumed at home increased by a mere 0.9% over the last year. From June 2021 through June 2022, grocery prices increased 12.2%, according to the consumer price index.

In the last decade, consumers generally have seen a 2.7% per year increase in grocery prices.

While high interest rates have arguably helped ease inflation, some have argued it has also led to a cooling job market. The U.S. economy added 142,000 jobs in August, which is up from the 114,000 added jobs in July, which had marked one of the worst months for hiring in recent years.

Meanwhile, the unemployment rate ticked down to 4.2% in August after hitting 4.3% in July, the highest it had been since October 2021. In historical terms, a 4.2% unemployment rate is low, but it comes after a period of near-record-low unemployment. The unemployment rate bottomed at 3.4% in 2023.