U.S. inflation cools further in August, clearing path for rate cuts to begin

U.S. consumer prices rose marginally in August, but underlying inflation showed some stickiness, which could discourage the Federal Reserve from delivering a half-point interest rate cut next week.

The consumer price index increased 0.2 per cent last month after climbing 0.2 per cent in July, the Labor Department’s Bureau of Labor Statistics said on Wednesday. In the 12 months through August, the CPI advanced 2.5 per cent. That was the smallest year-on-year rise since February 2021 and followed a 2.9 per cent increase in July.

Economists polled by Reuters had forecast the CPI gaining 0.2 per cent and rising 2.6 per cent year-on-year. Though inflation remains above the U.S. central bank’s two per cent target, it has slowed considerably, allowing policymakers to focus more on the labor market in their quest to sustain the economic expansion.

Government data last week showed nonfarm payrolls increasing below expectations in August but the unemployment rate falling to 4.2 per cent from near a three-year high of 4.3 per cent in July, reducing the odds of a 50 basis point rate cut and boosting the chances of a quarter-point reduction.

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The labor is cooling amid a significant moderation in hiring, reducing the risks of inflation reigniting.

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Early on Wednesday, financial markets saw a roughly 29 per cent probability of a 50 basis points rate cut at the Fed’s Sept. 17-18 policy meeting, according to CME Group’s FedWatch Tool. The odds of a quarter-point rate reduction were around 71 per cent.

The central bank has maintained its benchmark overnight interest rate in the current 5.25 per cent-5.50 per cent range for a year, having raised it by 525 basis points in 2022 and 2023.

Annual consumer price growth has slowed considerably from a peak of 9.1 per cent in June 2022 as higher borrowing costs curb demand.

Excluding the volatile food and energy components, the CPI climbed 0.3 per cent in August after rising 0.2 per cent in July. In the 12 months through August, the so-called core CPI increased 3.2 per cent. That followed a 3.2 per cent gain in July.

Some economists cautioned that lingering stickiness in core inflation argued against a half-point rate cut next Wednesday.

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