The US inflation levels have shrunk to levels not seen since February 2021. The annual CPI clocked a 3-year low of 2.5% YoY in August. It marks a significant milestone towards the Fed’s 2% inflationary target. This development boosts the possibility of a 25bps cut in the interest rates by the Fed next week, which currently stand at a 23-year high of 5.25-5.5%.

The core CPI that excludes food and energy prices remained steady. The core CPI was 3.2% compared to a year ago. Although the report sets a positive precedent, the core CPI figures remain a point of contention. From a broader outlook, Restaurant meals and prices of some food items surged. Overall food inflation grew 2.1% from a year ago. It was up 0.1% from July. Car insurance is up 16.5% since last August. Owning a car has turned out to be a pricey affair with maintenance and repair costs increasing 4.1% year over year and parking and toll fees nearly 5% up from August 2023. Gasoline prices have dropped 10.3% lower than a year ago with a monthly dip of 0.6%. Costs borne by Senior Citizens have continued to increase – up 7% from last year. Hospital and related services increased 5.8% from a year ago. Prescription drugs and Over-the-counter drugs grew 2% and 2.4% annually.

Investors and market participants have heavily factored in a 25bp rate cut by the Fed next week. As pointed out by Elyse Ausenbaugh, Head of Investment Strategy at JP Morgan Wealth Management, “We think prospects for a gradual- rather than an aggressive – rate-cutting cycle should be embraced by the investors. That would reflect broader economic health and a normalization of activity as the vestiges of pandemic-era distortions fizzle away.”