US inflation falls to lowest level since February 2021 as Fed prepares to cut interest rates
US inflation fell to its lowest level since February 2021 in August, new figures show, but core prices rose faster than anticipated.
Figures from the Bureau of Labor Statistics showed that inflation fell to 2.5 per cent in August, down from 2.9 per cent the month before and in line with expectations.
Prices increased 0.2 per cent on the month, with the increase largely due to higher ‘shelter’ costs, which covers the cost of housing.
However, core inflation, which strips out volatile components such as food and energy, remained stuck at 3.2 per cent in August.
Month-on-month, the core index rose 0.3 per cent in August, which was slightly ahead of expectations.
Following the release, the dollar strengthened slighlty while Treasury yields rose, suggesting investors do not expect a rapid round of interest rate cuts.
The figures are the last major piece of data to be released before the Fed’s latest interest rate announcement, which takes place next Wednesday.
Fed Chair Jerome Powell has confirmed that interest rates will be cut, telling an audience at Jackson Hole that the “time has come” for policy to adjust.
But traders were unsure whether rates will be reduced by 25 or 50 basis points, reflecting fears that the Fed has already been too slow to ease borrowing costs.
Those fears were sparked by figures out in early August, which showed a rapid increase in unemployment as well as a sharper than expected slowdown in jobs growth.
The most recent jobs figures, out at the end of last week, calmed nerves slightly. Unemployment edged lower while jobs growth recovered slightly from July’s horror show, albeit still slightly slower than expected.
Following the figures, traders pared back bets that the Fed would opt for larger interest rate cuts.
Markets think there is a roughly 15 per cent chance that the Fed will cut rates by 50 basis points, according to CME’s Fedwatch, down from nearer 30 per cent before the figures were released.
Neil Birrell, chief investment officer at Premier Milton Investors, said the likelihood of a 50 basis point cut took a “big knock” due to the core inflation figures.
Richard Flynn, managing director at Charles Schwab UK, said the figures “reiterate the likelihood of a slow cutting cycle”.
“Disinflationary pressures are strong enough to help ensure against a price spike, so the Fed can opt for a gentle pace to manage risks to the labour market and avoid a recession,” he said.