The latest US economic data presents a complex picture for the Federal Reserve ahead of its crucial policy meeting next week. The Consumer Price Index (CPI) for August rose 2.9% year-over-year, matching economist forecasts but accelerating from July's 2.7% annual increase. On a monthly basis, prices advanced 0.4%, exceeding the 0.3% estimate and up from July's 0.2% gain.
Shelter costs were the largest contributor to the monthly increase, rising 0.4%, while food prices edged up 0.5%. Energy prices climbed 0.7%, led by a 1.9% rise in gasoline. Core inflation, which excludes volatile food and energy components, held steady at 3.1% year-on-year. On a monthly basis, core prices rose 0.3%, matching July's increase which was the strongest monthly gain in six months.
In a separate report, the Producer Price Index (PPI) for final demand unexpectedly declined 0.1% in August, contrasting sharply with Wall Street expectations of a 0.3% increase. On an annual basis, producer prices rose 2.6%, well below the anticipated 3.3% gain. Core PPI also fell 0.1% against estimates of a 0.3% rise.
The data releases have sharpened the monetary policy debate. Markets are now pricing in a near-certain probability of a rate cut at the Fed's upcoming meeting, with the CME FedWatch tool indicating a 90% chance of a 25 basis point reduction. Some investors see growing possibility of a larger half-point cut, particularly after preliminary revisions revealed the US economy added 911,000 fewer jobs in the 12 months through March 2025 than earlier reported.
Bankrate financial analyst Stephen Kates called the CPI release "one of the most consequential of the year," warning that renewed price acceleration in essentials could be troubling as labor market momentum shows signs of fading. The number of Americans filing new unemployment claims stood at 263,000 for the week ended September 6, above estimates of 235,000.
New York Fed President John Williams has acknowledged the challenge of steering policy amid rising unemployment and slowing growth. The Fed faces a delicate balancing act between its dual mandate of price stability and full employment, with markets expecting at least one or two more rate cuts by 2026.
