Inflation in August reached its lowest level since February 2021, as reported by the Labor Department on Wednesday. The report also revealed a key measure that exceeded expectations, indicating a potential quarter percentage point rate cut from the Federal Reserve.
The consumer price index, which tracks the costs of goods and services across the U.S. economy, rose by 0.2% for the month, aligning with the Dow Jones consensus, according to the Bureau of Labor Statistics.
This brought the 12-month inflation rate to 2.5%, a decrease of 0.4 percentage points from July, slightly below the anticipated 2.6% and marking its lowest level in 3½ years.
On the other hand, the core CPI, excluding volatile food and energy prices, increased by 0.3% for the month, slightly higher than the estimated 0.2%. The 12-month core inflation rate remained at 3.2%, in line with predictions.
The marginal rise in core CPI puts the Fed on alert regarding inflation, potentially ruling out a more aggressive interest rate approach when policymakers convene next Tuesday and Wednesday.
Stocks dipped post-report, while Treasury yields showed mixed results. However, the market recovered later in the day, with major averages turning positive.
In the fed funds futures market, traders indicated an 85% likelihood that the Federal Open Market Committee would approve a quarter percentage point interest rate reduction at the conclusion of its meeting on September 18, as per the CME Group’s FedWatch measure. A month earlier, expectations leaned towards a 50 basis point cut.
While inflation showed signs of moderation, housing-related costs remained a concern. The shelter component of the CPI, with a significant weighting in the index, increased by 0.5%, contributing to about 70% of the core rise. The shelter index rose by 5.2% year over year.
Food prices saw a modest 0.1% increase, while energy costs declined by 0.8%.
In other aspects of the report, used vehicle prices dropped by 1%, medical care services decreased by 0.1%, and apparel prices rose by 0.3%. Egg prices surged by 4.8%.
Real earnings also saw an increase for the month, with average hourly earnings surpassing the monthly CPI rise by 0.2%, according to the BLS. Over a 12-month period, inflation-adjusted average hourly earnings rose by 1.3%.
Despite easing inflation, the Fed’s focus has shifted towards a slowing labor market. Job creation has halved since April compared to the previous five months. Central bankers emphasize the importance of preventing a broader slowdown, now as crucial as combating inflation, which reached its highest level in over 40 years in the summer of 2022.
Regardless of the Fed’s decision post-meeting next Wednesday, markets are already factoring in lower rates. Treasury yields, particularly at the 2- and 10-year durations, are at their lowest levels in over a year. An inverted yield curve, a recession indicator, has recently reversed, often signaling both Fed rate cuts and economic slowdown.
Wednesday’s report provided further evidence of waning inflation, although it remains above the Fed’s 2% target. Some price categories have either remained high or increased.
“While inflation has eased, it does not mean that the prices of things that people buy have actually fallen,” said Lisa Sturtevant, chief economist at Bright MLS. “It just means that prices are not increasing as fast. In fact, U.S. consumers now are paying more than 20% more for goods and services than they were before the pandemic.”
For example, airline fares rose by 3.9% in August after declining for the previous five months. Motor vehicle insurance continued its upward trend, increasing by 0.6% to push the 12-month increase to 16.5%. Hospital and related services costs surged by 0.4% and are up by 5.8% from last year.
Conversely, a decrease in energy costs has contributed to lowering inflation figures. Gasoline prices dropped by 0.6% in August and are down by 10.3% from a year ago, part of a 4% decline in the energy index that includes a 12.1% decrease in fuel oil prices.
