Inflation rises 2.5% in August, less than expected

Inflation fell to its lowest level in more than three years in August, strengthening the case for the Federal Reserve to cut interest rates next week even as prices remain uncomfortably high for millions of Americans.

The Labor Department said on Wednesday that the Consumer Price Index (CPI), a broad measure of the prices of everyday items such as gasoline, groceries and rent, rose 0.2% in August from the previous month, in line with expectations of economists surveyed by LSEG.

Prices rose 2.5% in August compared to the same month a year ago, slightly below LSEG’s forecast and down from 2.9% in July. This is the lowest level since February 2021.

So-called core prices, which remove more volatile indicators such as gasoline and food to give a more accurate assessment of the trend in price increases, rose 0.3% month-on-month in August, slightly above LSEG’s forecast of 0.2%. The index was unchanged from the previous month, as expected, at 3.2% year-on-year.

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Overall, the report indicates that inflationary pressures in the U.S. economy continue to ease, although prices remain above the Federal Reserve’s 2% target.

The announcement of the lower-than-expected inflation rate comes as Federal Reserve policymakers are scheduled to meet at a time when they are likely to cut interest rates amid signs the economy is cooling. After the Fed left interest rates unchanged at a 23-year high of 5.25% to 5.5% in July, Fed Chairman Jerome Powell suggested in a speech at the Jackson Hole conference in August that “the time has come” to cut rates.

“The Fed is widely expected to cut rates by 0.25 percentage point next week, and with the CPI reading today being roughly in line with target, that looks likely,” said Chris Larkin, managing director of trading and investments at Morgan Stanley’s E*Trade. “Investors hoping for a bigger rate cut may be disappointed, but with inflation appearing subdued, markets will likely refocus on economic growth, particularly the employment picture.”

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Rising inflation has put severe financial pressures on most American households, forcing them to spend more on everyday necessities like food and rent. Rising prices are especially devastating for lower-income Americans, who tend to spend more of their already tight paychecks on necessities and therefore have less flexibility to save.

Most of the increase in core inflation in August was due to a 0.5% month-on-month increase in home prices, which are up 5.2% year-on-year and account for more than 70% of the total 12-month increase in the core inflation index, which excludes food and energy.

Other areas that saw notable year-over-year price increases included auto insurance (+16.5%), medical services (+3.2%), recreational services (+3.2%) and education (+2.3%).

Airfares had been falling for the past five months but rose 3.9% in August compared to July.

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Consumers also experienced increases in food prices, but August’s 0.1% monthly increase was lower than the 0.2% increases in the previous two months. Compared to a year ago, food prices were up 2.1% in August.

Eating out at home was unchanged from the previous month and up 0.9% from last year, while eating out increased 0.3% in August and is up 4% from a year ago.

The index for meat, poultry and fish rose 0.5% from the previous month in August, while eggs rose 4.8%.

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Stocks had a mixed reaction to the inflation report: The Dow Jones Industrial Average opened down 0.5%, while the S&P 500 lost 0.16% and the Nasdaq Composite added 0.29%.