US Consumer Prices Eases to 2.5% in August, Lowest Since Early 2021
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On 11th September US Bureau of Labor Statistics (BLS) reported inflation, as measured by the change in the Consumer Price Index (CPI), declined to 2.5% on a yearly basis in August from 2.9% in July,
The consumer price index, which tracks the overall cost of goods and services throughout the U.S. economy, rose by 0.2% in August. This brought the annual inflation rate down to 2.5%, a 0.4 percentage point drop from July.
Meanwhile, core CPI, which excludes the more volatile food and energy prices, rose by 0.3% in August. The year-over-year core inflation rate remained steady at 3.2%.
The modest rise in core CPI keeps pressure on the Federal Reserve to manage inflation, reducing the likelihood of a more aggressive interest rate hike during next week’s policy meeting.
U.S. inflation reached a peak of 9.1% in mid-2022, marking the highest level in four decades, fueled by sharp increases in the cost of food, gas, rent, and other essentials.
A major contributor to August’s overall inflation decline was the third drop in gas prices within the past four months.
While inflation has moderated gradually, housing costs remain a challenge. The shelter component of the CPI, which accounts for roughly one-third of the index, rose 0.5% and contributed about 70% of the core inflation increase. Year-over-year, the shelter index climbed 5.2%.
Food prices edged up 0.1%, while energy prices dropped 0.8%.
Other important changes in the report include a 1% decrease in used vehicle prices, a 0.1% decline in medical care services, and a 0.3% rise in apparel prices. Egg prices surged by 4.8%.
Real wages also grew in August, with average hourly earnings outpacing the monthly CPI increase by 0.2%, according to a separate release from the Bureau of Labor Statistics. Over the past 12 months, inflation-adjusted earnings have risen 1.3%.
Recently, the Fed's focus has shifted toward a cooling labor market. Since April, job creation has slowed to nearly half the rate seen in the previous five months. Central bankers are now balancing the need to prevent a broader economic slowdown with their fight against inflation, which hit its highest level in over 40 years during the summer of 2022.
Following the report, stocks initially dropped, while Treasury yields were mixed. However, the market rebounded later in the day, recovering its losses as major indexes turned positive.
In the fed funds futures market, traders now see an 85% chance of a quarter-point (25 basis point) rate cut when the Federal Open Market Committee meets on Sept. 18, according to CME Group’s FedWatch tool. A month ago, markets were expecting a 50 basis point cut.
Regardless of the Fed's decision next week, markets are already anticipating lower rates. Treasury yields, particularly the 2- and 10-year notes, have dropped to their lowest levels in over a year. The inverted yield curve, a recession indicator, has recently reversed—a signal that typically suggests both upcoming Fed rate cuts and an economic slowdown.
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