Inflation continues to rise, but ‘the year-over-year numbers are pretty meaningless at this point,’ says economist—what actually matters

Inflation is on the rise again, but it may not be as bad for your wallet as it sounds.

Here’s what’s happening: Driven by surging energy prices, the closely watched year-over-year inflation rate climbed from 3.2% to 3.7% in August, according to the Labor Bureau’s latest consumer index report. That’s still well above the Federal Reserve’s target rate of 2%, so it remains a concern.

However, the year-over-year rate should be taken with a grain of salt, as it no longer reflects the dramatic drop from peak prices in summer 2022.

This has created a distortion known as “base effects” where monthly price increases in 2023 seem more significant than they actually are, even though they’re growing at nearly half the rate we saw in 2022.

“The year-over-year numbers are pretty meaningless at this point,” says Daniel Altman, chief economist at Instawork, an online staffing platform. “What matters is the current path of prices.”

To better gauge where inflation is headed, the Federal Reserve says it’s closely monitoring core inflation, a measure of inflation that excludes volatile food and energy prices, which can fluctuate wildly in a given month.

When you look at this measure, inflation is trending in the right direction. In August, core inflation rose by 0.3% after increasing by 0.2% the previous two months. That’s less than half the monthly rate we were seeing in early 2022.

The sweet spot is about 0.2%, says Sarah House, economist at Wells Fargo. Wells Fargo expects overall inflation to continue cooling, with a forecast of 2.2% inflation in 2024, says House.

“We’re starting to see progress on on inflation,” she says. “But there’s still quite a bit of distance before we reach the overall target of 2%.”

To reduce inflation, the Fed has discouraged spending by making it more expensive to borrow money. This has been done through a series of interest rate hikes, which have risen from near-zero in March 2022 to its current…