Inflation in the U.S. rose by 2.5% in August, marking the lowest annual increase in over three years, according to a report by the Labor Department.
The consumer price index (CPI) climbed by just 0.2% from the previous month, a figure that aligned with economists’ expectations.
However, despite this relatively mild increase, inflation remains uncomfortably high for millions of Americans, adding pressure to household budgets.
The latest data offers a potential boost to the Federal Reserve’s case for cutting interest rates at their upcoming meeting.
After keeping rates at a 23-year high of 5.25% to 5.5% in July, Federal Reserve Chair Jerome Powell hinted in a speech last month that a rate cut may be on the horizon as inflation shows signs of easing.
Core prices, which exclude volatile items such as food and energy, rose by 0.3% in August, slightly exceeding predictions of 0.2%.
Annually, core inflation stands at 3.2%, unchanged from the previous month. While the Fed’s inflation target is 2%, the current downward trend provides room for optimism.
“Today’s CPI reading keeps the Fed’s anticipated rate cut of 0.25% in play,” said Chris Larkin of E*Trade from Morgan Stanley. “While it may not meet the expectations of those hoping for a larger cut, the focus may now shift towards economic growth and employment.”
High inflation has posed significant obstacles for U.S. households, especially lower-income families who spend more of their income on necessities like food and rent.
Shelter prices saw a notable rise, increasing by 0.5% from July and 5.2% year-over-year. Shelter accounts for more than 70% of the core inflation rise over the past year.
Other categories experiencing price increases included motor vehicle insurance (+16.5%), medical care services (+3.2%), and recreation services (+3.2%).
Airline fares, which had been declining, reversed course with a 3.9% monthly increase in August. Food prices also edged higher, with grocery costs staying flat compared to last month but dining out prices rising by 0.3%. Compared to a year ago, food costs were up by 2.1%.
Despite these gains in inflation, financial pressures remain heavy, especially for lower-income Americans who have limited flexibility to adjust their spending.
This latest report may offer some relief in the long term, as economists expect the Federal Reserve to ease its monetary policy and shift its focus back to job growth and economic stability.
Stock market reactions were mixed, with the Dow Jones Industrial Average dipping 0.5%, while the Nasdaq gained 0.29%.
The Federal Reserve’s decision next week will be crucial as policymakers balance the need to curb inflation with the desire to stimulate economic growth.