Inflation falls to 3-year low as Fed prepares to cut interest rates next week

Inflation eases ahead of expected rate cuts

Inflation cooled further in August, falling to a three-year low and cementing views that the Federal Reserve will soon start cutting interest rates.

Prices rose 2.5% in the 12 months ending in August, down from 2.9% in July, with falling gasoline prices a large part of the decline, according to the latest figures from the Bureau of Labor Statistics. Excluding volatile food and energy prices, core inflation is believed to have remained unchanged at 3.2%.

Housing costs made up more than 70% of the year-over-year increase.

The pace of increases in the cost of food eased last month, and used vehicles and energy prices were lower than they were in July. Falling oil prices could mean gas prices will continue to decline in coming weeks.

Fed Chair Jerome Powell last month said "the time has come" for rate cuts, all but sealing the move at the central bank's two-day policy-setting meeting September 17-18. Less certain is how big a cut the Fed intends to make, likely a quarter- or half-percentage point. Additional reductions are likely to come later this year and into next. 

Why are prices still high if the inflation rate is dropping?

Traders on Wednesday hiked bets that the Fed would loosen policy at a less aggressive pace.

"Overall, inflation appears to have been successfully tamed but, with housing inflation still refusing to moderate as quickly as hoped, it hasn't been completely vanquished. Under those circumstances, we expect the Fed to take a measured approach to cutting interest rates," Paul Ashworth, chief North America economist at Capital Economics said in a research note.

Inflation peaked at 9.1% in June 2022 — a four-decade high — as the economy rebounded from the pandemic recession. More recent months have seen a cooling labor market, with hiring and wage increases slowing, and with the U.S. economy seemingly on a path toward a so-called "soft landing" whereby a recession is avoided. 

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