Inflation Just Fell Below 3 Percent. Here Are 5 Key Takeaways

How it could impact consumer prices, mortgage rates and more

Donna Fuscaldo and Daniel Bortz,

AARP

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En español

Published August 15, 2024

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AARP (Source: Getty Images (3))

First, the good news: Inflation cooled in July, falling below 3 percent for the first time since 2021. It’s the latest sign that the U.S. economy is on track for a soft landing despite a recent blip in stock market volatility that sowed fears of a recession among investors.

But not everything is rosy for consumers.

The Consumer Price Index (CPI) still rose 2.9 percent in the 12 months through July, which is above the Federal Reserve’s 2 percent target. Here’s what that means for consumer prices, mortgage rates and three other key economic barometers.

Prices are still high

Despite the slowing inflation rate, consumer prices continue to go up for a number of expenses.

“This is a big complaint among consumers. They hear that inflation is coming down, but they don’t feel it in their daily lives,” says Ted Rossman, a senior industry analyst at Bankrate. “Lower inflation of course means that prices are still growing,” he adds. “They’re just growing more slowly. But they’re building off a higher base, and that cumulative effect is important. A collection of common household expenses costs about 20 percent more now than it did in early 2022.” Take food, for example. Sure, prices are increasing at a slower rate — food at the grocery store is up only 1.1 percent year over year as of July — but the damage has already been done in the eyes of many consumers. Groceries that cost $200 a week a few years ago now cost $220, Rossman says.

Supply and demand is also playing a role in some prices. Year-over-year shelter costs are up 5.1 percent, largely because supply is tight whether you are buying or renting a home. Rossman says home insurance, which continues to surge due to higher losses brought on by climate change as well as higher costs for labor and materials, is also hurting home affordability.

“As the largest line item in most household budgets, housing affordability or lack thereof plays a big role in the overall inflation story,” he says.

Mortgage rates are expected to drop

Mortgage rates are sliding, with the average 30-year rate clocking in at 6.49 percent this week, down from a high of 7.79 percent last year, according to Freddie Mac data. And with inflation easing, the Federal Reserve is expected to cut its benchmark rate next month. That would likely result in lower borrowing costs for home buyers, homeowners who want to refinance and older homeowners looking to tap into their home equity by taking out a home equity loan or a home equity line of credit.

“Recent low and falling inflation readings certainly give the Fed assurance they’re on glide slope for a soft landing, which in turn has led the market to have confidence they’ll cut rates at their September, November and December meetings,” says Realtor.com senior economist Ralph McLaughlin. “The market is currently pricing in a 25 basis point cut in each of those months. While some of that has already been baked into the recent decrease in mortgage rates, there could be further drops if subsequent inflation readings continue to show progress toward the Fed’s 2 percent inflation target rate.”

Consequently, Realtor.com currently projects 30-year mortgage rates to settle around 6.3 percent by the end of the year.

Credit card interest rates should go down too

If the Fed does indeed cut the federal funds rate in September, consumers should see credit card interest rates fall. That’s no small thing, considering that half of Americans carry a credit card balance from month to month, a recent Bankrate survey found, and that baby boomers with credit card debt owe an average balance of $6,648, according to credit bureau Experian.

Zooming out, the average credit card interest rate has reached a record high 24.92 percent, according to a LendingTree analysis of over 200 credit cards from more than 50 issuers. Lower interest rates on credit cards could lead to big savings, depending on how much you owe and how diligent you are about paying off the debt.

Let’s say you owe $5,000 on a credit card and pay $250 a month. With a rate of 28.34 percent (the highest APR for new card offers, LendingTree says), you’d pay $1,848 in interest and pay off the balance in 28 months. Drop the rate to 21.5 percent and you’d pay only $1,246 in interest and wipe out the balance in 25 months.

There’s still time to lock in inflation-era savings rates

Rising inflation may have squeezed older adults’ budgets, but it has been welcome news for savers who have dealt with more than a decade of near-zero returns. “Right now, with higher interest rates, savers are getting rewarded,” says Sarah House, a senior economist at Wells Fargo. “It’s a very different environment than five to 10 years ago.”

While the national average savings account rate is currently 0.6 percent, according to Bankrate’s most recent survey on Aug. 15, there are still savings accounts that yield 5 percent or more. But you may not want to wait too long to lock in those rates. If the Fed begins cutting interest rates, you’ll likely start seeing a negative impact on savings account rates.

New and used car prices are falling but …

Fortunately, the pandemic supply chain issues have been worked out, and showrooms are well stocked with inventory, which is why prices for new and used cars have been declining. As of the July CPI, new vehicles cost 1 percent lower year over year, while used cars are 10.9 percent cheaper. But you wouldn’t know it if you were among the countless Americans who recently financed a vehicle purchase.

With the average interest rate for a new car loan hovering at 6.73 percent and 11.9 percent for a used car, according to Bankrate, the total cost of car ownership remains elevated. “Financing is not included in the CPI calculator of vehicles,” House says. “You don’t get the all-in cost, and that plays into the disconnect. It’s still very expensive to purchase a vehicle when you factor in financing costs.” Not to mention, car insurance is getting more expensive, with rates jumping 18.6 percent year over year in July.

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Donna Fuscaldo is a contributing writer and editor focusing on personal finance and health. She has spent over two decades writing and covering news for several national publications including The Wall Street Journal, Forbes, Investopedia and HerMoney.

Daniel Bortz is a personal finance editor at AARP, where he writes and edits money content for the website, from saving and budgeting to building wealth and money management skills. His work has been published by the New York Times, the Washington Post, Consumer Reports, Entrepreneur, Kiplinger, Newsweek, Money and other national publications.