In a significant economic update, the U.S. inflation rate dropped to 2.2% in August, as reported by the Commerce Department on Friday. This figure brings inflation closer to the Federal Reserve’s target, potentially paving the way for future interest rate cuts.
The personal consumption expenditures (PCE) price index, which the Fed closely monitors, saw a modest increase of 0.1% for the month. This decrease from 2.5% in July marks the lowest inflation rate since February 2021. Dow Jones economists had anticipated a 0.1% monthly rise and a 2.3% annual increase.
When excluding volatile food and energy prices, the core PCE rose 0.1% in August, aligning with the annual increase of 2.7%—slightly higher than July’s figure. Fed officials typically regard core inflation as a more reliable indicator of long-term trends. Forecasts had predicted a 0.2% rise for the month and a 2.7% annual increase.
“All quiet on the inflation front,” commented Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley. “Today’s PCE Price Index adds to a growing list of economic data that reflects stability. While growth may be slowing, there’s no sign of a sharp downturn,” he added, according to CNBC.
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Following the report, stock market futures showed positive movement, while Treasury yields dipped. This announcement comes shortly after the Federal Reserve’s decision to lower its benchmark overnight borrowing rate by half a percentage point to a target range of 4.75%-5%.
The inflation report is particularly noteworthy as it arrives amid ongoing pressures from housing costs, which surged 0.5% in August—the largest increase since January. Overall services prices increased by 0.2%, while goods prices fell by 0.2%.
This marks the Fed’s first significant easing since March 2020, a response to the early impacts of the COVID-19 pandemic, and represents a shift from its usual practice of quarter-point rate changes.
Recently, Fed officials have adjusted their focus from combating inflation to bolstering a labor market that is showing signs of softening. In their latest meeting, policymakers indicated the possibility of another half-point cut this year, with expectations for a full percentage point reduction in 2025, although market analysts anticipate a more aggressive approach.
