US inflation hits 3-year low as Fed prepares to cut rates

The sharp rise in post-pandemic inflation eased further last month as year-over-year price increases hit their lowest level in three years, paving the way for the Federal Reserve to cut interest rates next week.

Wednesday’s Labor Department report showed consumer prices rose 2.5% in August compared with a year earlier. This was the fifth consecutive annual decline, and the smallest such increase since February 2021. From July to August, prices rose just 0.2%.

Excluding volatile food and energy costs, so-called core prices rose 3.2% in August from a year earlier, the same as in July. On a month-over-month basis, core prices rose 0.3% last month, picking up from July’s 0.2% increase. Economists closely watch core prices, which often provide a better read on future inflation trends.

For months, falling inflation has provided gradual relief to American consumers hurt by price increases that emerged three years ago, particularly for food, gasoline, rent and other necessities. Inflation peaked in mid-2022 at 9.1%, the highest rate in four decades.

Fed officials have indicated they are increasingly confident that inflation will move closer to their 2% target and are now focused on supporting the steadily slowing labor market. As a result, policymakers are preparing to begin cutting their key interest rate from its 23-year high in hopes of bolstering growth and hiring.

A modest quarter-point cut is expected next week. Over time, a series of rate cuts should reduce the cost of borrowing across the economy, including mortgages, auto loans and credit cards.

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