"The Fed's Mouthpiece": CPI will prompt the Fed to gradually cut interest rates

"Federal Reserve megaphone" Nick Timiraos wrote on Wednesday that the inflation rate dropped to a three-year low in August, prompting the Federal Reserve to begin gradually cutting interest rates at next week's meeting.

According to data from the U.S. Department of Labor, the U.S. August CPI rose by 2.5% year-on-year, lower than July's 2.9%, marking the fifth consecutive month of cooling. The core CPI, which excludes the more volatile food and energy costs, saw a year-on-year growth rate of around 3.2%.

In contrast, economists surveyed by The Wall Street Journal had previously expected overall inflation to rise by 2.6% from the same period last year, with core prices rising by 3.2%.

After the report was released, major U.S. stock indices edged lower, with the Dow leading the decline. U.S. Treasury yields edged higher but remained near their lowest levels of the year.

Stronger housing inflation in August led to a slightly stronger-than-expected increase in core inflation, which may make it more difficult for officials to push for a larger 50 basis point rate cut at next week's Federal Reserve meeting. Traders on Wednesday increased their bets that the Fed would relax policy at a more moderate pace.

Many Fed officials have already hinted at rate cuts, and Wednesday's CPI report will not change that outcome. However, some officials had not completely ruled out the possibility of a larger rate cut, rather than the more traditional 25 basis point cut.

Food price increases slowed in August, while prices for used cars and energy fell from the previous month. The intensified selling in the oil market suggests that oil prices will continue to fall in the coming weeks, a key factor in the reversal of Americans' views on the U.S. economy.

For voters who have not yet decided whether to support Vice President Harris or former President Trump, the economy is a top issue. Inflation over the past few years has been a major weakness for Democrats, with voters consistently ranking rising energy, food, and housing prices as their top concerns.

As the report was released, investors were working hard to analyze the health of the U.S. economy, which has slowed from the rapid growth seen after the initial claims following the COVID-19 pandemic, when employers rushed to reopen and hire new employees.

Easing inflation provides some relief for households struggling with cost pressures. However, the labor market has also cooled, with slower hiring and wage growth, an increase in the average unemployment rate, and longer job searches.

With interest rates still high, Americans are waiting for relief from lower mortgage, auto loan, and credit card rates, with major retailers adapting to more bargain-seeking shoppers. Target slashed prices significantly last quarter to boost sales, while Amazon reported that more customers are seeking discounts and lower prices on essentials.

However, despite consumers looking for bargains, they have not stopped spending.

"We haven't seen any deterioration in the health of the consumer," Walmart's Chief Financial Officer John David Rainey said during a recent earnings call Companies and investors will closely watch the Federal Reserve's meeting next week, whether it is the size of the rate cut or Federal Reserve Chairman Powell's view on the health of the economy