US inflation has slowed steadily from its four-decade peak last June, and it's expected to cool further thanks to easing car prices and rents. And if the US job market slows further, that could help bring it down even more.
And while rising energy costs have pushed so-called headline inflation higher — the latest Consumer Price Index rose 3.7% in August from a year earlier, a faster pace than July's 3.2% annual rise — core inflation, which strips out volatile food and energy prices, decelerated to a 4.3% annual rate in August, slower than July's 4.7%.
All together, the data is leading economists to predict that inflation will continue its slowdown in the months ahead.
"Right now, we're seeing some weakening price momentum in goods overall, particularly used cars, but we're also seeing new vehicle [prices] slow down, and we think that prices will continue to come down into year-end," José Torres, senior economist at Interactive Brokers, told CNN.
"High interest rates are really dampening demand in the automobile category, and also reduced credit availability has made it to where that sector is just tough for consumers to make purchases in."
Prices of used cars and trucks declined for the third straight month in August, falling 1.2% that month from July, and were 6.6% lower in August than the same month a year ago. Prices of new cars rose a tepid 0.3% in August from the prior month, after declining 0.1% in July and staying flat in June.
However, the United Auto Workers' ongoing strike could throw a wrench into that expected slowdown in vehicle prices if inventories dwindle due to slower production.
Shelter costs, which make up a big chunk of the CPI, are also poised to slow in the coming months. Those costs rose 0.3% in August from the prior month. It was the smallest gain since January 2022.
"We've seen rental costs decelerate pretty sharply over the past year. We're seeing rents for single-family homes also moderate pretty extensively, and so as that starts to show in the official measures of inflation, we think that there's a lot more weakness to come out of that sector," said Sarah House, senior economist at Wells Fargo.
She added that the expected cooling of both the job market and the broader economy could help ease inflation in the services sector, which encompasses services provided at businesses such as restaurants and hospitals.
A recent San Francisco Fed paper argues that shelter inflation could turn negative in the second half of 2024, helping both headline and core inflation tick down.
Saira Malik, chief investment officer at Nuveen, told CNN that financial markets, like the Fed, are more focused on core inflation and have already priced in a pickup in headline inflation. Despite the expected inflation drop, she said investors anticipate the Fed will keep interest rates steady and not cut them anytime soon.
"It may take a little bit longer than expected for inflation to come down to 2%, and inflation being in a 2-3% range next year is reasonable," she said. "But if core inflation comes in too hot, markets will price in another rate hike."
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