U.S. inflation decreased to 2.5% in August, paving the way for the Federal Reserve to cut interest rates at its next meeting scheduled for September 18.
Decline in Year-on-Year Consumer Price Index
The year-on-year Consumer Price Index (CPI) fell to 2.5% from the previous 2.9% recorded in July, marking the slowest pace since February. This decline was within the margin of what economists had anticipated. According to the U.S. Bureau of Labor Statistics (BLS), July's Consumer Price Index increased by 0.2% from June’s 0.1% decline. The August year-on-year Core CPI numbers retained their previous levels at 3.2%, which economists had also anticipated. The Consumer Price Index tracks the prices consumers pay for goods and services, while the Core Consumer Price Index tracks all items except food and energy.
Inflation and Job Market
After the inflation data was released, the yield on two-year Treasury bonds rose by 0.08 percentage points to 3.69%. The yield on two-year Treasury bonds moves in the opposite direction to price trails interest rate expectations. The publication of the inflation numbers caused the contracts tracking the tech-rich Nasdaq 100 and those tracking the S&P 500 share index to lose 0.5%. According to the BLS, the unemployment rate rose to 4.3% in July from 4.1%, raising concerns about the future economic trajectory of the United States.
Potential Economic Consequences
In August, 142,000 new jobs were created, up from July’s figure of 89,000, but still short of economists' forecasts of 164,000 new jobs. The Federal Reserve had been looking for economic signs that inflation in the U.S. was slowing down to gradually cut rates. However, a declining job market could prompt a more aggressive approach to rate cuts by the U.S. central bank.
The decline in U.S. inflation to 2.5% opens the door for the Federal Reserve to reduce interest rates at its next meeting. However, the job market situation and further economic data will play a crucial role in the final decision.
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