The Fed’s closely watched inflation indicator falls to its lowest level since the beginning of 2021

WASHINGTON (AP) — As a presidential campaign deeply marked by Americans’ frustration with high prices nears its end, the government said Thursday that an indicator of inflation closely watched by the Federal Reserve is rising to near pre-pandemic levels had sunk.

The Commerce Department reported that prices rose just 2.1% year-on-year in September, compared with a 2.3% increase in August. That’s barely above the Fed’s 2% inflation target and in line with levels seen in 2018, long before prices began rising following the pandemic recession.

On a monthly basis, prices rose slightly by 0.2% in August-September, compared with a 0.1% increase in July-August.

However, some signs of inflationary pressures remained. Excluding volatile food and energy costs, so-called core prices rose 2.7% in September from a year earlier, remaining unchanged from August. On a monthly basis, core prices rose 0.3% in August-September, compared to just 0.1% in July-August.

The rise in the core interest rate is higher than the Fed would like, and if it remains stubbornly elevated, it could cause the central bank to slow the pace of its rate cuts in the coming months.

Still, core inflation has fallen to an annual rate of 2.3% over the past six months, compared with 2.5% in August. And economists expect the Fed to cut its key interest rate by a quarter point at its meeting next week.

Overall, the latest signs of a sustained slowdown in inflation come five days before an election that left many voters upset about the economy, particularly because average prices are still nearly 20% higher than four years ago. Former President Donald Trump largely blamed the Biden-Harris administration’s energy policies and promised that inflation would ” completely disappear ” if he is elected. Vice President Kamala Harris has promised to ban food price gouging and reduce the cost of child care and health care.

Economists say Trump’s policies would actually lead to that make inflation worseparticularly because of his plans to impose sweeping new tariffs and initiate mass deportations of migrants and other immigrants. Experts say Harris’ price gouging proposals would have little short-term impact.

Inflation peaked at 7.1% in June 2022 as the economy recovered from the pandemic recession amid severe shortages of spare parts and labor, according to a measure released Thursday, the Personal Consumption Expenditure Price Index. Inflation has cooled steadily over the past two years as supply chains recovered from disruptions caused by the pandemic and the Fed raised its key interest rate to a four-decade high, depressing home sales and car purchases.

The Fed tends to prefer the inflation indicator released by the government on Thursday – the price index for private consumption expenditures – to the more familiar one Consumer Price Index. The PCE index attempts to account for changes in the way people shop when inflation rises. For example, it can be recorded when consumers switch from more expensive national brands to cheaper private label brands.

In general, the PCE index tends to have a lower inflation rate than the CPI. That’s partly because high rents carry twice as much weight in the CPI as in the index released on Friday.

Chairman Jerome Powell Signaled at the end of August that the Fed is increasingly confident that inflation is coming under control. And in July and August, employment figures weakened. These trends prompted the Fed to do so reduce its key interest rate last month by an outsized half point. As inflation continues to slow, the Fed is expected to cut its key interest rate by a quarter point in November and probably another quarter point in December.

However, the prospects for future interest rate cuts are not entirely clear. Hiring rebounded sharply in September and the unemployment rate fell to a low 4.1%, suggesting the job market may be stronger than it seemed last summer. Retail sales also rose at a healthy clip last month. And on Wednesday the government estimated that the economy had grown many times over 2.8% annual interest rate a solid pace in the July-September quarter, driven by strong consumer spending.

The positive economic data has sparked some speculation that the Fed could decide to forego a rate cut in December or cut rates more slowly next year.

On Friday, the government will release its last important economic data before the presidential election: the October labor market report. It will probably do more distorted image than usual on the labor market, as hurricanes Helene and Milton are said to have caused tens of thousands of workers to lose their jobs, at least temporarily.