The election campaign in the USA is in full swing. And, probably, it was not by chance that they were right now published data regarding the slowdown in the growth of inflation in the USA. The findings of the Ministry of Labor were published precisely during the presidential campaign, in which the rising cost of living became a key issue.
Inflation in the US fell to the lowest level in the last three years.
According to analytical data, it gradually continued to slow down last month. Analysts said the data increased the likelihood that the Federal Reserve will cut interest rates by 0.25 percentage points next week. This will make loans cheaper for businesses and consumers, which will stimulate economic growth.
Consumer prices rose 2.5% in the 12 months to August as prices for gasoline, used cars and trucks and some other goods fell. That’s the slowest rate of growth since February 2021 and down from 2.9% in July, despite a surprise increase in house prices.
“Overall, inflation appears to have been tamed, but with the housing market still refusing to slow down as quickly as we had hoped, it has not been completely eradicated,” commented the chief North American economist at Capital Economics.
It is worth noting that energy prices in the US in August decreased by 4% year-on-year. Gasoline prices have declined, falling more than 10% in the month since August 2023. And food prices slowed down to 2.1%. This helps reduce the overall inflation rate. Data from the US Department of Labor showed that the unemployment rate also fell to 4.2%, which overall helps to stabilize the economy.
However, prices for other goods continued to rise. Excluding food and energy, which often fluctuate and can mask underlying trends, prices rose 3.2% for the year due to higher prices for airfare, auto insurance, rent and other housing costs.
“This reminds us not to get too excited about a few months of better inflation data”, – noted the chief economist of Fitch Rating. “That’s not enough to stop the Fed from cutting rates later this month, but persistent service inflation will be one reason the Fed won’t cut rates aggressively over the next year or so.”
Why lower inflation causes the Fed to lower rates
Russia’s invasion of Ukraine caused a sharp rise in oil prices, catalyzing global inflation. US inflation peaked at 9.1% in June 2022, but has since declined to a healthy 2%.
Central banks, including the Fed, began raising borrowing costs two years ago to slow inflation. In 2021, prices began to rise globally due to pandemic-related supply issues and increased government spending.
Lower inflation may trigger the Federal Reserve rate cut expected in September for several reasons – to stimulate economic growth, reduce the cost of borrowing, control deflation and maintain financial stability.
When inflation falls to an acceptable level – as it is now in the US – the Fed can lower rates to make credit cheaper for businesses and consumers. This stimulates spending and investment, which contributes to economic growth. Lower rates make credit more affordable, which can help businesses expand and create new jobs. It also makes it easier for consumers to buy valuable movable and immovable property.
However, if inflation falls too much, it can lead to deflation, which is undesirable. Lower rates help keep prices stable and stabilize financial markets by reducing the cost of debt servicing for companies and governments.
The role of unemployment in controlling inflation
Unemployment plays an important role in controlling inflation in the US because of the relationship between the labor market and prices. Thus, the Phillips curve reflects the inverse relationship between unemployment and inflation. When unemployment is high, wages remain flat or rise slowly, which keeps inflation at bay. Conversely, when unemployment is low, employers are forced to raise wages to attract workers, which can lead to higher inflation.
High unemployment reduces the purchasing power of the population, which reduces the demand for goods and services and, accordingly, restrains price growth. Low unemployment, on the contrary, increases purchasing power, which can contribute to rising prices.
The US Federal Reserve uses the unemployment rate as one of the indicators for making interest rate decisions. For example, a rise in interest rates may reduce inflation but also lead to an increase in unemployment.
What do average Americans think about the dynamics of consumer prices
It is interesting to deviate from dry statistics, taking into account the observations of, say, an American housewife from Pennsylvania. “They put red labels on everything.” The woman was so shocked by the increase in prices in recent years that she started writing on social networks about her expensive purchases in supermarkets. But now he notes with relief that recently prices have become more affordable.
She still shops strategically — avoiding certain brands and going to budget stores — but now sees more discounts. “I’ve noticed that over the last few months, red price tags have appeared on everything,” – she said, adding that her family recently took a vacation for the first time in three years. But, according to her, large-scale financial problems such as housing costs remain an overwhelming burden, so she does not plan to have more than one child.
Optimistic inflation indicators remained almost unnoticed against the background of the first debates and the commemoration of another anniversary of the attack on the Twin Towers in New York on September 11.
The housewife, who lives in a state where the two political parties have parity on the campaign trail, meaning both believe they will win in November, said she didn’t vote in 2020 and isn’t sure if she will vote this year. “It’s very hard to believe that they can actually do anything,” she said.
Tatyana Morarash
