Key Takeaways:
- Inflation hit a new three-year low of 2.5% in August
- Fed likely to begin gradually reducing rates next week
- Cooling labor market sparks concerns of broader economic deterioration
What Happened?
Inflation eased to 2.5% in August, a new three-year low, extending its cooling streak to five months. Core inflation, excluding food and energy costs, held steady at 3.2%.
The report likely cemented the Fed’s shift in focus from inflation to the cooling labor market, where softer hiring has raised concerns about the economy.
Why It Matters?
The inflation data teeing up the Fed to begin gradually reducing interest rates at next week’s meeting. However, firmer shelter inflation contributing to slightly stronger-than-expected core prices in August may make it harder for officials to push for a larger 0.5% rate cut.
The Fed’s decision will be scrutinized for what it says about how Chair Jerome Powell sees the risks of sticky inflation versus a more pronounced economic slowdown.
What’s Next?
Traders ramped up bets that the Fed will start lowering rates by 0.25% next week, but expect over 1% in total cuts this year, implying at least one 0.5% cut in November or December. The debate over accelerating rate cuts will likely focus more on labor market data than inflation, particularly if readings continue in this vein.
Easing inflation has given some relief to cost-weary families, but the cost of living remains high. Major retailers are adjusting to more deal-seeking shoppers, though consumer spending has remained resilient so far.
