Inflation Nears Fed’s 2% Target as Donald Trump's Economic Polling Advantage Shrinks

The Federal Reserve’s preferred inflation measure showed a further decrease, nearing its 2% target, as price pressures ease. With inflation subsiding, the Fed is expected to continue rate cuts, while former President Donald Trump’s economic polling lead diminishes in the latest survey.

Inflation Eases Toward Fed’s Target, Potentially Undermining Trump’s Economic Polling Advantage

On September 27, the Federal Reserve's preferred inflation measure indicated that price pressures were subsiding. This development is anticipated to stimulate additional interest rate reductions by the Federal Reserve this year and in the forthcoming year.

The Commerce Department reported that prices increased by only 0.1% from July to August, a decrease from the 0.2% increase the previous month. Inflation decreased to 2.2% from 2.5% in July a year ago and is now only marginally above the Federal Reserve's 2% inflation objective.

The former President Donald Trump's polling advantage on the economy may be diminishing due to the lowering of inflation. In a survey conducted last week by The Associated Press-NORC Center for Public Affairs Research, respondents were nearly evenly divided on whether Trump or Vice President Kamala Harris would perform better in terms of the economy.

According to Fortune, this is a substantial change from when President Joe Biden was still in the race when approximately six in ten Americans disapproved of his economic management. The change implies that Harris may be shedding some of Biden's economic baggage as consumer sentiment improves.

According to the report released on September 27, groceries increased minimally last month, while energy costs decreased by 0.8%, with petroleum prices being the primary factor.

Core prices, which exclude volatile food and energy costs, increased by a mere 0.1% from July to August, a decrease from the 0.2% increase observed in the previous month. This was the fourth consecutive month in which monthly price increases were below the Federal Reserve's annual target of 2%. Core prices increased by 2.7% in August compared to the previous year, marginally higher than in July.

“Sticky inflation is yesterday’s problem,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a research note.

Fed Signals More Rate Cuts as Inflation Declines, Economic Growth Surges at 3% Annual Rate

Last week, the central bank reduced its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates. Inflation has plummeted from its 2022 zenith to just above the Fed's 2% policy target. The policymakers also indicated they anticipate a further half-point decrease in their crucial rate in November and December. Additionally, they expect that there will be four additional rate reductions in 2025 and two in 2026.

The Federal Reserve is increasingly likely to reduce its key benchmark rate in the months ahead due to the ongoing decline in inflation.

On September 26, Tom Barkin, the president of the Federal Reserve Bank of Richmond, endorsed a cautious approach to rate cuts. During an interview with The Associated Press, he expressed his support for a "modest" decrease in the Federal Reserve's key rate. However, Barkin stated that he intends to guarantee that inflation continues to decline before reducing the benchmark rate to a point where it would no longer constrain the economy.

Additionally, the report released on September 27 indicated that Americans' incomes and expenditures experienced only a slight increase last month, with both figures increasing by a mere 0.2%. Nevertheless, these modest increases align with the upward revisions of income and expenditure figures from the previous year that were made this week. The revisions indicated that consumers were in better financial condition than had been previously reported on average.

According to the revisions, Americans have also been saving a more significant portion of their incomes in recent months, resulting in a savings rate of 4.8% in September, which was previously below 3%.

According to a government report released on September 26, the economy expanded at a robust 3% annual rate in the April-June quarter. Additionally, economic growth was more significant than previous projections for most of 2018-2023.

The Federal Reserve prefers the personal consumption expenditures price index, an inflation gauge the government released on September 27, over the more widely recognized consumer price index—the PCE index endeavors to account for changes in consumer behavior that occur in response to inflationary pressures. For instance, it can document the transition of consumers from more expensive national brands to less expensive store brands.

The PCE index generally indicates a lower inflation rate than the CPI. This is partially because elevated rents are regarded as having twice the significance in the Consumer Price Index (CPI) than in the index released on September 27.

U.S. Economy Grows at 3% Annual Rate Amid Strong Consumer Spending and Rising Industrial Production

According to recent reports, the economy is expanding at a robust rate. On September 26, the government confirmed its previous estimate that the U.S. economy expanded at a robust 3% annual rate from April to June. This growth was facilitated by solid consumer spending and business investment.

Additionally, numerous economic indicators have been encouraging. Last week, the number of Americans applying for unemployment benefits reached its lowest point in four months.

Last month, Americans increased their spending at retailers, indicating that consumers are still willing and able to spend more despite the cumulative impact of three years of high borrowing rates and excess inflation.

The nation's industrial production also experienced a rebound. The rate of single-family-home construction experienced a significant increase from the previous year. According to preliminary data from the University of Michigan, consumer sentiment increased for the third consecutive month. The more favorable prices perceived by consumers for cars, appliances, furniture, and other long-lasting products were the driving force behind the brighter outlook.