Inflation softens to lowest level in three years as Fed prepares to cut interest rates

Price growth continued to soften in the US last month, falling to its lowest level since February 2021 as the Federal Reserve prepares to cut interest rates for the first time since the start of the pandemic.
As inflation continues to fade, the consumer price index rose at an annual rate of 2.5% in August – down from 2.9% in July, and below the 2.6% expected by economists.
On a month-to-month basis, the index rose 0.2% last month, in line with its rate of growth during July.
The so-called “core” CPI reading, which strips out volatile food and energy prices, came in higher than economists expected, rising 0.3% in August. This measure is closely monitored by the policymakers tasked with steering the US economy.
With inflation falling, but many Americans still grappling with higher prices, the US economy is at a crossroads. With two months left before tens of millions of US voters head to the polls, the cost of living has been a key issue on the presidential election campaign trail.
In spring 2022, having insisted that a sharp rise in inflation was a “transitory” effect of the economic disruption wrought by Covid-19, the Fed engineered an extraordinary U-turn and embarked upon a round of hikes that would ultimately lift interest rates from close to zero to a two-decade high.
Shortly after the Fed set out on this campaign to cool the world’s largest economy, the consumer price index peaked at 9.1% – its highest level in a generation – in June 2022. Inflation has since fallen back significantly, but at times remained stubbornly high, as policymakers sought to bring it down to their medium-term target of about 2%.
Fed officials are seeking a so-called “soft landing”, where price growth is normalized and recession avoided. Amid tentative signs of an economic slowdown, including in the US labor market, the central bank appears set to start cutting rates.
“The time has come,” the Fed chair, Jerome Powell, said last month, declaring that inflation was now on a “sustainable” path back to normal levels – and signaling it was preparing to cut rates at its meeting next week.