Inflation hits lowest level since 2021

In August, prices rose as expected while the annual inflation rate dipped to its lowest level since February 2021, according to a Labor Department report. This decline sets the stage for a likely 0.25% rate cut from the Federal Reserve in its upcoming meeting.

The consumer price index (CPI), which measures the overall cost of goods and services in the U.S. economy, saw a 0.2% monthly increase, in line with expectations. This brought the 12-month inflation rate down to 2.5%, a slight drop from July's 2.9%. However, the core CPI—which excludes volatile categories such as food and energy—rose by 0.3%, a bit higher than the anticipated 0.2%. The core inflation rate over the past 12 months stood at 3.2%, matching forecasts.

Despite the positive signs of moderating inflation, housing costs continue to pressure the overall index. The shelter component, which comprises roughly one-third of the CPI, rose 0.5% for the month and 5.2% over the past year. This sector accounted for much of the all-items index increase.

Food prices remained stable with a modest 0.1% rise, while energy prices dropped by 0.8%. Other areas of the report showed that used vehicle prices fell 1%, medical care services dipped 0.1%, medical care commodities fell 0.2%, and apparel prices increased 0.3%.

In the federal funds futures market, traders are now pricing in an 85% chance that the Federal Reserve will announce a 25 basis point rate cut at its next meeting on September 18, according to CME Group’s FedWatch tool.