The Federal Reserve is on track to continue raising interest rates as inflation slowly improves. (iStock)

The annual level of inflation improved slightly in August for the second consecutive month but still remains near the 40-year high set earlier this year, according to the latest report from the Bureau of Labor Statistics (BLS).

The Consumer Price Index (CPI), a measure of inflation, rose 8.3% annually in August, which is down from 8.5% in July, the BLS said. This decrease was primarily driven by falling gas prices, as the gasoline index decreased 10.6% in August. On a monthly basis, inflation rose 0.1%.

Overall, prices for shelter, food and medical care expenses increased in August, which were offset by the drop in gasoline prices. The food index rose 0.8% and the home index increased by 0.7%.

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Inflation improved but remains higher than expected

Although inflation improved in August, the CPI was still higher than expected. 

"Today's higher-than-expected CPI reading shows that we still have a long way to go before inflation returns to more normal levels," Scott Brave, Morning Consult's consumer spending economist, said in a statement on Tuesday. "While the recent decline in gas prices has provided a welcome reprieve for consumers, it represents just one part of the larger consumer basket, and prices for much of that basket continue to increase at rates that far exceed incomes."

The Federal Reserve’s target goal for inflation is 2%. Throughout most of the past decade, the CPI has held steady in the 2% range or lower, according to the Federal Reserve Bank of Minneapolis. However, it rose more significantly in 2021 to 4.7% before reaching 40-year highs in 2022. The last time inflation was above today’s levels was in 1981 when it hit 10.3%.

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Fed expected to continue raising interest rates

Economists explained that August’s inflation data confirms that yet another rate hike is likely to come at the Federal Reserve’s September meeting. 

"Despite indications of a slow-down in headline inflation in the last two months, it is still much higher than the Federal Reserve's target of 2%," Dawit Kebede, Credit Union National Association's (CUNA) senior economist, said in a statement. "The Federal Reserve Open Market Committee is expected to raise rates by another 75 basis points during their meeting this month. This raises the target rate between 3% to 3.25%."

And what’s more, these rate hikes could continue through the remainder of the year. 

"The economy is heading into a more restrictive interest rate environment with two more expected hikes in November and December," Kebede said. 

As the federal funds rate increases, other interest rates will also be pushed higher including those for personal loans, mortgages and credit cards.

"The surprise to the upside all but guarantees continued aggressive action from the Fed, likely putting more upward pressure on mortgage rates," Odeta Kushi, First American's deputy chief economist, said in a statement. "Mortgage rates have more than doubled compared with one year ago, resulting in slower sales and house price deceleration. Even higher rates will likely accelerate the great housing market moderation."

If you want to take advantage of interest rates before they rise further, you could consider refinancing your mortgage to potentially lower your monthly payment. To see if this is the right option for you, contact Credible to speak to a home loan expert and get all of your questions answered.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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