The Fed meets next week and is expected to reduce the federal funds rate.
The inflation rate in the U.S. dropped to its lowest level since February 2021, falling to 2.5% in August, according to the Consumer Price Index (CPI) report.
The 12-month inflation rate in August fell from 2.9% in July and was lower than the 2.6% consensus estimates. August was the fifth month in a row that inflation rates fell.
The report comes one week before the Federal Open Market Committee (FOMC) meets to discuss interest rates. The four-basis point decline is the largest since October 2023 and it brings the rate closer to the Fed’s goal of 2% annual inflation.
It also strengthens the case for the FOMC lowering interest rates next week for the first time since the start of the pandemic.
Energy prices decline
Overall, the inflation rate for the month of August rose 0.2%, which was the same as the previous month and equal to economists’ expectations.
The biggest declines came within the energy sector, as overall energy prices fell 0.8% in August and 4% over the last 12 months.
Oil prices plummeted 1.9% in August and were down 12.1% over the past year, while gas prices tumbled 0.6% for the month and 10.3% over the past year.
Also, used cars and trucks prices dropped 1% for the month and 10.4% for the year. Further, energy services, which include electricity and utility prices, fell 0.9% in August and rose 3.1% over the past 12 months.
Food prices rose 0.1% in August and 2.1% over the past 12 months. Food at home prices were flat for the month and up 0.9% since August of 2023, while food away from home prices rose 0.3% in August and 4% for the full year.
Core inflation, which excludes food and energy prices, stayed the same at 3.2%. It was also in line with expectations. However, for the month of August, core inflation was 0.3%, which was up from 0.2% in July and higher than the 0.2% increase that was expected.
Shelter costs were the main culprit in the core CPI increase as prices jumped 0.5% in August and 5.2% over the past 12 months. Shelter costs rose 0.4% in July.
The inflation rate for transportation services remains the highest, rising 0.9% in August and 7.9% over the past 12 months. The 0.9% August increase is up from 0.4% in July.
Markets mixed at the open
Markets were mixed on Wednesday, as investors sorted through the numbers. The big drop in overall inflation, due to falling energy prices, was unexpected, but the enthusiasm may have been tempered a bit by higher core inflation rates.
The Dow was down more than 200 points at the open, or 0.6%, while the Nasdaq was up about 50 points, or 0.3%. The S&P 500 was mostly flat.
Economists do not expect this report to alter the Fed’s expected plan to cut rates at its meeting next week. However, it makes it more likely that the reduction will be 25 basis points and not 50 basis points.
“It’s a mixed bag, I suspect the Federal Reserve would have liked to have seen softer numbers in order to justify a potential 50 bps cut at the upcoming meeting,” Jason Pride, chief of investment strategy and research at wealth management firm Glenmede, told Reuters. “We would still say that there is a chance they will consider 50 basis points at this meeting, but this probably makes it more likely that they proceed with a 25-basis rate cut.”
The FOMC meets next Tuesday and Wednesday, September 17 and 18.
