Prices increased as expected in August while the annual inflation rate declined to its lowest level since February 2021, according to a Labor Department report Wednesday that sets the stage for an expected quarter percentage point rate cut from the Federal Reserve in a week.
The consumer price index, a broad measure of goods and services costs across the U.S. economy, increased 0.2% for the month, in line with the Dow Jones consensus, the Bureau of Labor Statistics reported.
That put the 12-month inflation rate at 2.5%, down 0.4 percentage point from the July level and compared with the estimate for 2.6%.
Food prices rose just 0.1%, while energy costs slid 0.8%.
Elsewhere in the report, used vehicle prices decreased 1%, medical care services declined 0.1% and apparel prices increased 0.3%.
With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated,” said Seema Shah, chief global strategist at Principal Asset Management.
Treasury yields, particularly at the 2- and 10-year duration, are at their lowest levels in more than a year.
Wednesday’s report offered more evidence that inflation is waning, though it remains above the Fed’s 2% goal.
Hospital and related services costs jumped 0.4% and are up 5.8% from last year.
At the same time, a pullback in energy costs has helped bring down inflation figures.
According to a Labor Department report released on Wednesday, which paves the way for the Federal Reserve’s anticipated quarter-percentage-point rate cut in a week, prices rose as anticipated in August while the annual inflation rate fell to its lowest level since February 2021.
A general indicator of the cost of goods and services in the United States is the consumer price index. S. according to the Bureau of Labor Statistics, the economy grew by 0.2 percent for the month, in line with the Dow Jones estimate.
This resulted in a 12-month inflation rate of 2 percent, which was 0 percentage points lower than the level in July and compared to an estimate of 2 percent.
The price of food increased by just 0.1 percent, but the cost of energy decreased by 0.8 percent.
In other sections of the study, the cost of used cars dropped by 1%, the cost of healthcare services dropped by 1%, and the cost of clothing increased by 0.3 percent.
Treasury yields increased, but stock market futures saw a decline after the report.
At the end of its meeting on September 25, traders in the fed funds futures market priced in an 85% chance that the Federal Open Market Committee would approve a quarter of a percentage point, or 25 basis points, reduction in interest rates. FedWatch, a measure from the CME Group, puts it at 18.
The market wasn’t expecting to see this CPI report. Seema Shah, chief global strategist at Principal Asset Management, stated that the Fed’s path to a 50 basis point reduction has grown more difficult as a result of core inflation data that was higher than anticipated.
The hawks on the committee will probably use today’s CPI report as proof that the final mile of inflation needs to be managed carefully and cautiously—a strong argument to default to a 25 basis point reduction, she continued. “The number is certainly not an obstacle to policy action next week,” she said.
Real earnings rose for the month as well; according to a separate BLS release, average hourly earnings exceeded the monthly CPI increase by 0.2 percent. The average hourly wage increased by 1.3 percent on a 12-month basis after accounting for inflation.
Recently, the Fed’s focus has shifted to the labor market’s slowdown. The rate of job creation has decreased to almost half of what it was in the previous five months since April. In the summer of 2022, inflation reached its highest level in over 40 years. According to central bankers, averting a wider slowdown is now just as crucial as combating it.
Markets are factoring in lower rates even before the Fed announces its decision at the end of its meeting on Wednesday. Treasury yields are at their lowest points in over a year, especially for the 2- and 10-year durations. The recent reversal of an inverted yield curve, a recession indicator, frequently signals an impending rate cut by the Federal Reserve in addition to an impending slowdown in the economy.
The data released on Wednesday provided additional proof that inflation is declining, even though it is still higher than the Federal Reserve’s 2 percent target. In certain areas, prices have either increased or remained high.
“While inflation has decreased, it does not imply that consumer prices have decreased,” stated Lisa Sturtevant, Bright MLS’s chief economist. It simply indicates a slower rate of price increases. Actually, U. s. Compared to before the pandemic, consumers are now spending more than 20% more on goods and services. “.
For example, airline fares rose by 3 percent in August following a decline of the preceding five months. Automobile insurance also kept going up, increasing by 0.6 percent to bring the 12-month increase to 16.5%. The cost of hospitals and related services increased by 0.4 percent and is 50.8 percent higher than the previous year.
Inflation figures have also decreased as a result of a decline in energy costs. As part of a 4 percent decline in the energy index, which has included a 12 point 1 percent drop in fuel oil prices, gasoline fell by 0 points 6 percent in August and is down 10 points 3 percent from a year ago.
