CPI inflation report pumps the brakes on big Fed rate cut bets

Updated at 9:58 AM EDT

U.S. inflation pressures eased notably last month, data indicated Wednesday, but core prices held steady, suggesting the Federal Reserve will likely be patient in lowering borrowing costs into the autumn months and beyond.

The Commerce Department said its headline Consumer Price Index for the month of August was pegged at an annual rate of 2.5%, down from the 2.9% pace recorded in June. and the lowest since February of 2021.

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On a monthly basis, price pressures edged 0.2% higher, thanks in part to a modest 2.6% per gallon decline in domestic gasoline prices.

So-called core inflation, which strips out volatile components like food and energy, held at an annual rate of 3.2% matching Wall Street's 3.2% forecast and pegged at the lowest rate in more three years.

The monthly reading of 0.3% was just ahead of Wall Street forecasts and was up modestly from the final July reading of 0.2%.

"The Fed is widely expected to cut rates by  25 basis points next week, and today’s more-or-less on-target CPI reading keeps that very much in play," said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.

"That may disappoint those investors hoping for a bigger cut, but with inflation seemingly under control, the markets will likely turn their focus back to the economic growth side of the equation—especially the employment picture" he added.

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U.S. stocks extended declines following the data release, with the S&P 500 marked 28 points lower in the opening minutes of trading and the Dow down 432 points amid an ongoing pullback in bank stocks. The tech-focused Nasdaq, meanwhile, slipped 33 points.

Benchmark 2-year Treasury note yields jumped 8 basis points to 3.625% while 10-year notes were pegged at 3.648%.

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.05% higher at 101.672.

The CME Group's FedWatch, meanwhile, suggests an 85% chance that the Fed will lower its benchmark lending rate by a quarter of a percentage point next week in Washington, up from around 71% prior to the data release.

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"Inflation trends will give the Fed opportunity to pivot toward the employment mandate for the rest this year," said Jeffrey Roach, chief economist for LPL Financial in Charlotte.

"Given the stickiness of services inflation, the Fed will likely cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if we have further deterioration in the job market," he added.

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