As autumn ushers in cooler temps, the Federal Reserve welcomes cooler inflation: the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) report finds inflation dropped to 2.5% in August, bringing it to a three-year low.
And that’s a far, far cry from the 9.1% inflation we experienced in 2022.
This is, of course, the result of an aggressive Fed policy that kept interest rates at 5.25%–5.50% all year. And it bodes well for a potential interest rate cut in the (very) near future.
But analysts are still keeping a hawkish eye, especially as key sectors like housing remain unbudged by the Fed’s efforts and are keeping “core inflation” (a measure of inflation with volatile categories like food and energy stripped out) elevated.
But before we get into all that — and what it all means for you — let’s talk about how inflation works.
First: How is inflation measured?
Inflation is the upward creep of the prices of goods and services. It usually happens because the demand for goods and services is rising faster than companies can produce and supply them. That makes them more scarce, which makes them more valuable, which pushes prices up. When wages don’t rise to match, that creates a decrease in purchasing power. (Translation: Things cost more and you’re not making more, so you can’t buy as many things.)
Inflation is often measured using a standard benchmark called the Consumer Price Index (CPI), which you might have heard of. The CPI is calculated by looking at a standard set (“basket”) of goods (food, medical care, clothing, etc) and averaging their change in price over time.
There’s also a measure called “core inflation,” which is basically all that stuff, minus food and energy prices. It can be easier to judge what’s really happening in the economy when you exclude them, because food and energy tend to be more volatile, driven by short-lived factors, and just overall less reflective of economic health.
And the last measure to know about is called Personal Consumption Expenditures (PCE). It’s a bit broader than the CPI and weighs some things like health care a bit more heavily. It’s also the measurement that the Federal Reserve considers the most when they make policy decisions.
What drove August 2024’s inflation numbers?
First, let’s talk about what’s keeping inflation afloat: shelter costs. “Shelter accounted for more than 70% of core CPI’s gain in the 12 months ending in August. Core CPI would have increased just 0.1% last month if shelter prices were excluded,” reports Axios.
Housing costs rose by 5.2% overall in August, up by 0.5% from the previous month. One explanation for stubbornly high shelter inflation? The BLS only collects rent data every six months. That means readings on rent inflation are delayed. In a June press briefing, Fed Chair Jerome Powell said that it may take “several years” for CPI readings to accurately reflect the current market.
The price of car insurance also remains stubbornly high (here’s our explainer on why that is), although it improved marginally in August, rising 16.5% from a year earlier. But there’s a light at the end of the tunnel for car owners.
“The worst is behind us and we should continue to see more stability in rates going forward,” Josh Damico, Vice President of Insurance Operations at Jerry, told the New York Times. “We’re hearing from carriers that they’ve stopped filing for new rate increases with state regulators and have pivoted toward looking for ways to increase new business with policy sales.”
More good news: The price of groceries, gas, and electricity fell. But it may take a while for consumers to feel real relief at the checkout aisle or gas pump.
How should you manage your money right now?
It’s impossible to know what will happen in the future, especially right now, but here are some things to think about.
Don’t keep more than you need to in cash
This is something we say anyway — but when inflation is high, cash gets less valuable, so the advice becomes even more urgent. Here’s what we recommend always keeping in cash (as in, in an FDIC-insured bank account):
Money to pay your bills
Your emergency fund (three to six months’ worth of take-home pay)
Savings for short-term goals (things you’ll need money for in the next one to two years)
If you’re the kind of person who tips a little more toward “cautious” on the risk tolerance scale, you could consider adding a bit more to your emergency fund — if things are going to cost more later, your savings might not go quite as far.
But for the rest of your money, we typically recommend investing it.
Shop around for the best interest rates on savings
Higher federal interest rates lead to higher interest rates paid by savings accounts. If you have a large chunk of cash in the bank (like a complete emergency fund, for example), see if you can find a savings account paying more.
Keep investing regularly
If you’re investing for long-term goals (those more than a few years away), we’d probably recommend that you just keep doing what you’re doing. Every period of inflation is different, and in the past, it’s affected different types of investments in different ways (which is, after all, the point of having a diversified portfolio).
We do know (and as we’ve seen this year) periods of economic uncertainty tend to make the markets nervous, which can lead to volatility. So we recommend using a technique called dollar-cost averaging, which means investing regularly, a little bit at a time, no matter what’s going on in the market. You’ll end up investing when markets are up and down in a way that evens out over time. It takes the timing guesswork out of it.
TL;DR: We don’t know if inflation will continue to slow toward the Fed’s goal. All we can do is try to make the best choices we can with the information we have — and adjust along the way.
Disclosures
