The latest Labor Department report reveals that the annual inflation rate has dropped to its lowest level since February 2021, paving the way for an expected quarter percentage point rate cut from the Federal Reserve in the coming week.
Consumer Price Index (CPI) Increases 0.2% in August
The CPI, a broad measure of goods and services costs across the U.S. economy, rose 0.2% in August, in line with the Dow Jones consensus. This brings the 12-month inflation rate down to 2.5%, a 0.4 percentage point decrease from the July level and the lowest level in 3½ years.
Core CPI Excludes Volatile Food and Energy Prices
The core CPI, which excludes food and energy prices, increased 0.3% in August, slightly higher than the 0.2% estimate. The 12-month core inflation rate remained at 3.2%, in line with forecasts.
Housing-Related Costs Remain a Concern
Despite the moderating inflation rate, housing-related costs continue to be a issue. The shelter component of the CPI, which accounts for about a third of the index, climbed 0.5%, contributing significantly to the increase in the all-items measure. The shelter index was up 5.2% year over year.
Other Key Findings
- Food prices rose 0.1%, while energy costs slid 0.8%.
- Used vehicle prices decreased 1%, medical care services declined 0.1%, and apparel prices increased 0.3%.
- Real earnings also increased for the month, with average hourly earnings outpacing the monthly CPI increase by 0.2%.
- Inflation-adjusted average hourly earnings rose 1.3% on a 12-month basis.
Market Reaction and Fed Expectations
Stocks slumped following the report, while Treasury yields rose. Traders priced in an 85% chance that the Federal Open Market Committee will approve a quarter percentage point interest rate reduction when its meeting concludes on September 18.
Expert Insights
“This isn’t the CPI report the market wanted to see. With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated,” said Seema Shah, chief global strategist at Principal Asset Management.
