Inflation Nears Pre-Pandemic Levels – What You Need to Know
With inflation finally nearing pre-pandemic levels, the Federal Reserve’s main inflation gauge has shown a marked drop, hitting the lowest rate since early 2021. The Commerce Department reported that prices rose only 2.1% in September year-over-year, falling in line with the Fed’s 2% inflation target. It’s a strong signal that prices are stabilizing after the roller-coaster years post-COVID. Let’s dive into what these numbers mean for your finances, the job market, and the upcoming presidential election.
Why the Fed’s Inflation Gauge Matters
The Fed has been laser-focused on curbing inflation by raising interest rates aggressively since 2022. The goal? Slow down runaway prices without plunging the economy into a recession, a challenging “soft landing” that many economists thought was out of reach. September’s inflation rate of 2.1% suggests the Fed’s strategy might actually be working.
But let’s not celebrate just yet—some pressure points remain. When we look at core inflation (which excludes volatile food and energy costs), we see a different story. Core prices rose by 2.7% in September from a year ago, steady for three months. And while this is much lower than peak pandemic inflation, it’s still above the Fed’s comfort zone.
Key Takeaways from the Fed’s Report
Here’s what the recent inflation data tells us in a nutshell:
- Core inflation is steady at 2.7%, with monthly gains showing slight increases.
- Consumer spending is still robust, fueling growth without severe cost increases.
- Wage growth is moderate, keeping pace with the inflation target.
So what does this mean for the Fed’s next steps? Economists predict the Fed will likely reduce its rate by a quarter-point in November, with another possible reduction in December if inflation continues to cool.
Consumer Spending and Wage Growth – The Dual Drivers of Inflation
Americans aren’t just making it through the inflation crisis—they’re spending confidently, with consumer spending rising 0.5% from August to September. This rise in spending has powered solid economic growth, helping the economy expand at a 2.8% annual rate in the third quarter. When incomes rise, though more slowly than in previous months, people tend to save less and spend more, which is keeping businesses afloat and providing jobs.
Wages and benefits have also slowed to a 0.8% growth rate from July to September. This is important because high wage growth can lead to further inflation if companies pass on labour costs to consumers. But for now, wage increases appear modest enough to keep inflation in check.
What About the Presidential Race?
As inflation becomes a central issue in the upcoming election, both sides are pitching solutions. Former President Donald Trump has suggested that inflation would disappear if he were re-elected, promising policies like sweeping new tariffs and reduced immigration. Experts, however, argue that these actions could worsen inflation by limiting supply chains and raising costs.
Vice President Kamala Harris, on the other hand, has proposed price-gouging regulations to cap essential items like groceries. While well-intentioned, analysts believe this policy would have only a limited effect on consumer prices in the short term.
Both candidates’ positions reflect voters’ concerns over economic pressures. The reality? Inflation’s path ahead is uncertain and dependent on global and local economic dynamics.
The Job Market – A Vital Piece of the Puzzle
As the job market fluctuates, inflation expectations and the Fed’s policies may shift. Although hiring slowed in July and August, September brought a strong rebound, with the unemployment rate falling to 4.1%. This tight labor market, along with continued consumer spending, suggests the economy is more resilient than previously thought.
Upcoming data like October’s jobs report will offer a clearer picture just days before the election. This report, however, may be clouded by external factors such as Hurricanes Helene and Milton, which disrupted the workforce in multiple regions.
The Fed’s Inflation Gauge vs. CPI – Why It Matters
Many people hear about the Consumer Price Index (CPI), which is another popular measure of inflation, but the Personal Consumption Expenditures (PCE) price index is the Fed’s preferred tool. The PCE gauge is typically lower than CPI, reflecting changes in consumer shopping habits and providing a broader measure of inflation’s impact on the economy.
For example, the PCE index can capture shifts from premium to store-brand products as prices rise, which CPI may not fully account for. This is one reason why the Fed relies on the PCE index, viewing it as a better representation of how inflation affects everyday spending.
What’s Next for Interest Rates?
As it stands, Fed Chair Jerome Powell and his team remain cautiously optimistic. With cooling inflation and stable consumer spending, the Fed is expected to proceed with gradual rate reductions. However, the surprising strength of retail sales and hiring in September has sparked speculation that the Fed may reconsider its stance if these trends persist.
By year-end, expect some adjustments from the Fed as they balance a steady economy with the goal of keeping inflation at or below 2%. Whether this translates into lower interest rates for consumers or businesses in the long run remains to be seen.
Final Thoughts – Is the Worst of Inflation Behind Us?
If this trend of low inflation holds, we could be witnessing a “soft landing” where high rates stabilize the economy without causing a recession—a rare and welcome outcome. With the presidential race heating up, economic policies on both sides will continue to shape the public conversation about how inflation should be handled going forward.
In the meantime, consumer spending and moderate wage growth are key to keeping inflation in check. As we approach the new year, the Fed’s rate adjustments and economic data will set the tone for whether inflation can stay at manageable levels. For now, however, we seem to be on a path of cautious optimism.
