Inflation has just hit a milestone. Here’s what that means for your bank account

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It’s not just temperatures that are starting to cool—after nearly two years of red-hot inflation, inflation has also slowed significantly. And that is likely to provide some relief in the near future for people who want to take out a mortgage or payday loan.

The monthly gauge of inflation, the Consumer Price Index (CPI), rose at a slower pace than expected in July. Prices of goods and services rose 2.9% over the 12-month period, according to data released Wednesday by the Bureau of Labor Statistics (BLS).

Notably, this is the first time since March 2021 that the annual inflation rate has been below 3%.

The CPI report for July is another indication that inflation is headed in the right direction, and that Federal Reserve policymakers should feel comfortable cutting interest rates in September as widely expected, Brian Jacobsen, an economist at Annex Wealth Management, said. Fast company.

“The CPI report shows that inflation was very high,” said Jacobsen.

What does this mean for consumers?

Beginning in March 2022, the Federal Reserve raised the key interest rate—the federal funds rate—to reduce inflation that eventually reached a 40-year high. With inflation now below 3% a year, that may be “psychologically significant” for consumers, though less so for central banks that monitor a wide array of inflation measures, Jacobsen noted.

The disconnect between how the Fed thinks about inflation versus the public at large is always tricky to make sense of, and especially since inflation has become a hot topic ahead of November’s presidential election. The pain of inflation is often easier to see than what consumers feel when it starts to cool.

Inflation does not mean that prices are falling, but rather that they are not rising as quickly, Jacobsen explains: “Prices are not at the level that people remember when they look back, say, four years ago. .”

That said, the CPI report confirmed one of Jacobsen’s observations—that airfares have fallen recently, one of the few categories where prices fell between June and July. Other categories that experienced monthly price declines were used cars and trucks, health care, and clothing.

Back to normal

An inflation reading of less than 3% is normalization. Over the past 40 years, the 12-month inflation rate has averaged 2.8%. And cooling inflation will feed into the economy in another significant way: lower borrowing costs.

Central bankers are scheduled to meet in mid-September, when market participants believe a rate cut is not guaranteed, even though Fed Chairman Jerome Powell said last month that an interest rate cut “could be on the table.” Lower interest rates may start to spell relief for borrowers, although it will also mean that interest rates on savings accounts will drop.

Jacobsen is in line with nearly four in five economists surveyed by Bloomberg recently, who predict that Fed policymakers will opt for a “modest” 25 basis point rate cut at their September meeting, rather than an aggressive rate cut. If they are right, that would mark the first rate cut in more than four years, bringing rates to a range of 5% to 5.25% from the current range of 5.25% to 5.5%.

Every move by the Fed is closely watched, and watched closely. Some people have criticized policymakers for holding off on cutting interest rates, including a group of Democratic senators led by Senator Elizabeth Warren, but the calls for action appear unlikely to have subsided in a month.

“Even if they’re late to the party, at least they’re showing up,” Jacobsen said of the Fed’s possible rate cut next month.

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