The Consumer Price Index data released Wednesday indicates that the annual inflation rate slowed to 2.5% in August, sparking optimism that the Federal Reserve Board may reduce interest rates at its upcoming meeting later this month.
The 2.5% all-items index increase for the 12 months ending in August is the smallest since February 2021, according to federal data. The "core index," which excludes volatile food and energy costs, rose 3.2% for the same period, primarily driven by shelter costs, which accounted for 70% of the increase.
Following the release of the August CPI data, the stock market fell on Wednesday morning. Traders possibly interpreted persistent "core inflation" as a sign that the Federal Reserve might implement a smaller-than-expected rate cut at its September 17-18 meeting.
The core inflation index, formally known as the all-items-less-food-and-energy index, shows a 5.2% increase in shelter costs over the past year. Other notable increases since August 2023 include motor vehicle insurance (+16.5%), medical care (+3.0%), recreation (+1.6%), and education (+3.1%).
Energy costs have decreased by 4% over the past year. Within that period, gasoline costs dropped by 10.3%, fuel oil declined by 12.1%, and the natural gas index dipped by 0.1%. However, electricity costs have increased by 3.9%.
New vehicle prices have dropped by 1.2% over the past year, while used cars and trucks have seen a decline of 10.4%. Food prices have risen by 2.1%, mainly driven by a 4% increase in the food-away-from-home index over the past year.
On a monthly basis, the all-items index increased by 0.2% in August on a seasonally adjusted basis, consistent with July's rise. However, excluding food and energy prices, the core index rose by 0.3% monthly after rising by 0.2% in July and 0.1% in June.
After annual inflation peaked at 9% mid-2022, the Federal Reserve initiated several interest rate hikes throughout 2022 and 2023 to cool down economic activity. Interest rates have been held at a 23-year high since August last year, but during its last meeting in July, the Fed signaled it might begin lowering the federal funds target rate later this year.
