A closely watched report on U.S. inflation showed that consumer prices rose at the slowest annual rate in three years in August, according to the latest data from the Bureau of Labor Statistics released Wednesday morning.
The consumer price index (CPI) rose 2.5% in August from a year earlier, a slowdown from the 2.9% annual price increase in July and the slowest annual pace since early 2021. The annual increase was also in line with economists’ expectations.
The index rose 0.2% from the previous month, matching the monthly gain in July and what economists had expected.
On a “core” basis, which strips out the more volatile costs of food and gas, prices rose 0.3% in August from the previous month and 3.2% from a year ago. Core prices rose 0.2% month-over-month and 3.2% year-over-year in July.
Although moderating, annual inflation has remained above the Federal Reserve’s 2% target. However, recent economic data, including a jobs report that showed a weakening labor market, point to a near-certain rate cut by the end of the Fed’s next policy meeting on Sept. 18.
“It’s time for policy action,” Fed Chairman Jerome Powell said last month at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.
Read more: What the Fed’s rate decision means for bank accounts, CDs, loans and credit cards
The question now is how quickly the Fed will cut rates.
“This is not the CPI report the market wanted to see,” Seema Shah, chief global strategist at Principal Asset Management, wrote in response to the report. “With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated.”
“The number certainly doesn’t preclude policy action next week, but hawks on the committee are likely to seize on today’s CPI report as evidence that the final stretch of inflation needs to be managed with care and caution – a strong case for moving to a 25 basis point cut.”
On Tuesday, markets had priced in a nearly 100 percent chance that the Federal Reserve will cut interest rates by the end of its September meeting. However, immediately after the data was released, the odds of a 25 basis point cut versus a 50 basis point cut were split 73/27, compared to a 56/44 split last week, according to the CME FedWatch Tool.
Sticky shelter, food prices
Notable headlines from the inflation numbers include the shelter index, which rose 5.2% on an unadjusted annual basis, up slightly from July’s figure. The index rose 0.5% month over month after rising 0.4% in July “and was the largest factor in the increase among all items,” the BLS said.
According to economists, the higher core inflation is largely due to persistent inflation.
Read more: What is inflation and how does it affect you?
That trend continued last month, with the rent index and owner equivalent rent (OER) rising 0.4% and 0.5%, respectively, from July to August. Owner equivalent rent is the hypothetical rent a homeowner would pay for the same property.
The out-of-home accommodation index rose 1.8% in August, after rising just 0.2% in July
Meanwhile, the energy index fell 0.8% in August after remaining flat in July when gas prices fell 0.6% last month. On a year-over-year basis, the energy index fell 4%.
The food index rose 2.1% in August over the past year, with food prices rising 0.1% month on month — proving to be a tricky category for inflation. The food at home index was unchanged from July to August, while food away from home rose 0.3%.
Other indexes with notable increases over the past year include auto insurance (16.5%), medical care (3%), recreation (1.6%) and education (3.1%).
According to the BLS, index numbers for used cars and trucks, household furnishings and business operations, medical care, communications and recreation, among other items, fell last month.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and send her an email at alexandra.canal@yahoofinance.com.
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