The leaves are turning, the temps are dropping, and inflation continues to cool ever so slightly. This month, the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) report finds inflation dropped to 2.4% in September from 2.5%, bringing it to a three-year low.
This is, of course, the result of an aggressive Fed policy that kept interest rates at 5.25%–5.50% all year. Just last month, however, the Fed announced a major rate cut of a full half-point, signaling confidence to the market that enough progress had been made on reducing inflation.
“Today’s report shows inflation has fallen back down to 2.4%, the same rate as right before the pandemic,” the White House celebrated in its statement to the press. “We keep making progress, with inflation returning to pre-pandemic levels, 16 million jobs created, lower interest rates, and low unemployment.”
But analysts are still keeping a hawkish eye, especially as core inflation — a measure of inflation that strips out volatile categories like food and energy — ticked up slightly, from 3.2% to 3.3%. That said, when we look more closely at the numbers, we find reasons for optimism, like shelter prices — which show signs of moderating after an extended period of elevation.
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 September 2024’s inflation numbers?
The good news? High shelter costs, which have been keeping inflation numbers elevated for the last year, are finally starting to moderate. For context, “shelter accounted for more than 70% of core CPI’s gain in the 12 months ending in August,” reported Axios last month.
In September, shelter costs rose only 0.2% month over month, lower than August's 0.5% increase, which means that inflation measures are finally starting to catch up to the reality on the ground. This is because the BLS only collects rent data every six months, which 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. But there’s a light at the end of the tunnel for car owners.
Food costs, medical care, clothing, and airfares all rose in September. On a more granular level, things like college textbooks, sports tickets, and jewelry and watches experienced record increases. (Time to rethink your holiday shopping lists?)
On a positive note, gas prices, health insurance, smartphones and other communication technologies, and education have experienced decreases.
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.