Kiplinger Inflation Outlook: A Good Enough Inflation Report

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Headline inflation eased for the fifth month in a row, to 2.5% in August. 

Energy costs went down across the board. Grocery costs were unchanged, on average. Used-car prices continued to drop, and prices of goods excluding food and energy have declined in five of the past six months. Inflation in goods is where the Federal Reserve wants it to be. However, price increases for services have been troublesome. Shelter is a large component of the index, and while analysts expected shelter cost inflation to ease, they ticked up in August. Car insurance continued its long-running surge, rising 0.6% for the month (and 16.5% over the past year). Hotel rates rose 2.0%. Airfares also jumped 3.9% in August, though they are still below where they were a year ago. Hospital costs were up again, and are 5.8% higher over the past year, though overall medical services edged down slightly. Restaurant prices rose a moderate 0.3%, in August and 4.0% over the past year.

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A small Federal Reserve interest rate cut in September is a virtual certainty. While the Fed has been hesitant to begin cutting rates until housing prices and other services with a history of stubborn momentum stabilized or started slowing down, Chair Powell’s recent statements at the Fed’s annual conference in Jackson Hole, Wyoming, seem to indicate that the time has come to start cutting rates, even if everything is not yet perfect on the inflation front. But the Fed will likely only consider small cuts of a quarter of a percentage point at its coming policy meetings until better progress on services inflation emerges.

Annual inflation numbers for the rest of this year are not likely to go below the August rate of 2.5%. This is the result of the relatively soft price increases that took place in the fourth quarter of 2023, which will make year-over-year comparisons in the upcoming Consumer Price Index reports seem like little progress is being made. But markets and economists will be focused on the month-to-month changes since these will point to whether inflation is slowing now. If those monthly improvements continue this fall, then expect the annual inflation rate to show a significant move towards the Fed’s target of 2% to 2.5% in the early months of 2025.

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