August Inflation Drop to 2.5%: Economic Impacts Explained

Inflation is a term used to describe the general increase in prices of goods and services over time. Essentially, it means that the money you have today will buy less in the future because prices are rising. For example, if a loaf of bread costs $1 this year and $1.05 next year, that’s inflation at work. This happens because the overall demand for goods and services can increase, or the supply can decrease, leading to higher prices. We can measure inflation by tracking the prices of a basket of common goods and services. Also, we usually express inflation as a percentage.

The Consumer Price Index (CPI) is a measure that examines the average change in prices over time that consumers pay for a basket of goods and services. Essentially, it tracks how much prices are increasing or decreasing, which helps to gauge inflation. The CPI includes everyday items like food, clothing, and transportation, making it a useful indicator of the cost of living. By comparing the current prices to those in a base year, the CPI shows how much prices have changed.

CPI for All Urban Consumers (CPI-U) is the most commonly used CPI, covering about 93% of the U.S. population. It includes professionals, the self-employed, the unemployed, and retirees, as well as urban wage earners and clerical workers.

Inflation August 2024

The inflation rose 2.5 percent for the 12 months ending August, the smallest 12-month increase since February 2021. The core inflation in August (all items less food and energy index) rose 3.2 percent over the last 12 months. The energy index decreased 4.0 percent for the 12 months ending August. The food index increased 2.1 percent over the last year. 

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent on a seasonally adjusted basis, the same increase as in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12-months, all items index increased 2.5 percent before seasonal adjustment.

The index for all items less food and energy rose 0.3 percent in August, after rising 0.2 percent the preceding month. Indexes which increased in August include shelter, airline fares, motor vehicle insurance, education, and apparel. The indexes for used cars and trucks, household furnishings and operations, medical care, communication, and recreation were among those that decreased over the month.

The food index increased 0.1 percent in August, after rising 0.2 percent in each of the previous 2 months. The index for food at home was unchanged in August.

Image Source: U.S. Bureau of Labor Statistics

Impacts of August Inflation Data on Market

The Federal Reserve (Fed) plays a crucial role in managing the U.S. economy through its monetary policy. The Fed’s primary goals are to promote maximum employment, ensure stable prices, and maintain moderate long-term interest rates.

When inflation reports (like August’s data) show changes in the inflation rate, the Fed assesses these changes to decide on appropriate adjustments to the federal funds rate. This rate influences overall economic activity by affecting borrowing costs for consumers and businesses.

The tech-heavy Nasdaq Composite (IXIC) surged on Wednesday, reversing a 0.5% intraday loss to close 2.2% higher. Initially, the index dipped due to mixed signals in the latest inflation report (drop inflation to 2.5% in August). 

However, concerns arose from the core CPI reading, causing confusion among traders and dashing hopes for a significant interest rate cut at the Federal Reserve’s upcoming meeting. 

This belief that a 25-basis point rate cut was more likely than a 50-basis point cut is surrounding the market. However, there is uncertainty about the Fed’s decision next Wednesday.

This realization spurred a market turnaround, with the S&P 500 gaining 1% and the Dow Jones Industrial Average rising 0.3%.