CPI Report: Inflation Hits 3-Year Low, Analysts Predict Fed Will Cut Rates Next Month

Inflation is now at 2.9%, marking the first time it has fallen below 3% since March 2021.

Wednesday's Consumer Price Index (CPI) report, which tracks the prices of essential goods and services and helps the U.S. Federal Reserve determine economic policy, found that prices rose 2.9% in July compared to July 2023.

This could mean that the Fed could lower the federal funds rate, or the interest rate banks and credit unions use to borrow and lend, at the scheduled meeting in September.

The Fed increased rates 11 times between March 2022 and July 2023. It's currently 5.33% , the highest in over two decades.

"The first rate cut since 2020 is coming next month," predicted market analysis firm The Kobeissi Letter on Wednesday based on the results of the CPI report.

Brian Coulton, chief economist at Fitch Ratings, told Bloomberg that the report helps "seal the deal for a September Fed rate cut."

The Fed has indicated that a rate cut could happen. Fed chair Jerome Powell said last month that "a reduction in our policy rate could be on the table" at the September meeting, provided inflation kept cooling.

^{Jerome Powell, chairman of the U.S. Federal Reserve. Credit: Al Drago/Bloomberg via Getty Images}

The CPI report showed that shelter was a key cause of inflation, with costs rising 5.1% over the year and 0.4% over the month.

Shelter contributed to almost 90% of the monthly increase for all items and 70% of the yearly increase for all items excluding food and energy.

Food prices also went up over the month, by 0.2%, while energy remained the same. If food and energy increases were not factored in, prices rose by 3.2% in July year-over-year.

Related: Federal Reserve Holds Interest Rates, Projects One Cut Before End of Year: 'Highly Attentive to Inflation Risks'