US inflation drops to lowest level since February 2021 as Fed prepares to cut interest rates

U.S. price growth continued to soften last month, falling to the lowest level since February 2021 as the Federal Reserve prepared to cut interest rates for the first time since the pandemic began.

As inflation eased, the consumer price index rose at an annualized 2.5% in August – down from 2.9% in July, and below the 2.6% expected by economists.

On a month-on-month basis, the index rose 0.2% last month, in line with the growth rate in July.

The so-called “core” CPI reading, which strips out volatile food and energy prices, came in more than economists expected, rising 0.3% in August. The measure is closely watched by policymakers charged with managing the US economy.

With inflation easing, but many Americans still grappling with high prices, the U.S. economy is at a crossroads. With two months to go before tens of millions of US voters head to the polls, the cost of living has become a key issue on the presidential campaign trail.

In the spring of 2022, insisting that the sharp rise in inflation was a “temporary” effect of the economic disruption caused by Covid-19, the Fed engineered a remarkable U-turn and began a round of hikes that would eventually lift interest rates to a two-decade high near zero.

The consumer price index peaked at 9.1% – its highest level in a generation – in June 2022, shortly after the Fed began its campaign to cool the world's largest economy. Inflation has slowed significantly, but has remained stubbornly high at times, with policymakers seeking to bring it down to their medium-term target of around 2%.

Fed officials are looking for a so-called “soft landing,” where price increases are normalized and a recession is avoided. Amid tentative signs of an economic slowdown, including the US labor market, the central bank appears poised to start cutting rates.

“The time has come,” the Fed chair, Jerome Powell, said last month, adding that inflation was now on a “sustainable” path back to normal levels – and signaled it was preparing to cut rates at its meeting next week.