FED’s key inflation indicator at 2.2 percent in August, the lowest level since February 2021.

Inflation in the United States approached the Federal Reserve’s target in August, easing the path for future interest rate cuts, the U.S. Department of Commerce reported today.

The Personal Consumption Expenditures Index, a measure the Fed relies on to gauge the costs of goods and services in the U.S. economy, rose by 0.1 percent from July, bringing the 12-month inflation rate in August to 2.2 percent, down from 2.5 percent in July, marking the lowest inflation rate since February 2021.

Economists had estimated that inflation would rise by 0.1 percent month-on-month and 2.3 percent year-on-year, so the current rate is certainly better than expected. Excluding food and energy, there was an increase of 0.1 percent month-on-month and 2.7 percent year-on-year. Fed officials typically look more closely at core inflation as a better measure of long-term trends. Their estimate for core inflation was 0.2 percent month-on-month and 2.7 percent year-on-year.

Furthermore, household incomes rose by 0.2 percent month-on-month, instead of the expected 0.4 percent, while consumption increased by the same amount, rather than the 0.3 percent initially expected.

Interestingly, inflation in the U.S. fell in August despite ongoing pressure from housing costs, which rose by 0.5 percent month-on-month. Additionally, service prices overall increased by 0.2 percent, while goods prices fell by 0.2 percent.

This report comes just over a week after the Fed cut its benchmark interest rate by half a percentage point to a range of 4.75 to 5 percent. This was the first cut since March 2020 and was an unexpectedly large reduction for the Fed, which had previously preferred to change rates by a quarter percentage point.

Last week, the Fed projected a further half-point cut to the benchmark interest rate by the end of this year and a full percentage point in 2025, while in 2026, they are expected to reduce the rate by another half a percentage point to achieve a range of 2.75 to 3 percent.