A rate cut by the independent US central bank would act to boost demand in the world's largest economy. That would give the Democratic party some good economic news to run on going into the final stretch of the 2024 presidential elections.
The consumer price index (CPI) slowed to 2.5 percent in August from a year ago, down from 2.9 percent in July and the lowest annual figure since February 2021, the Labor Department said in a statement.
This was slightly below the median forecast of economists surveyed by Dow Jones Newswires and The Wall Street Journal.
Monthly inflation picked up by 0.2 percent, in line with expectations.
"Today's report shows that we are turning the page on inflation," White House National Economic Advisor Lael Brainard said in a statement.
"With inflation coming back down close to normal levels, it is important to focus on sustaining the historic gains we have made for American workers during this recovery," she added.
Despite the good news on the headline rate, a measure of inflation that strips out volatile food and energy costs was largely unchanged on an annual basis, and rose by a larger-than-expected 0.3 percent from a month earlier, indicating that underlying inflation remains sticky.
"It still seems that some of the inflationary pressures are still related to what we would call catch-up inflation," Bernard Yaros, Oxford Economics' lead US economist, told AFP.
He pointed to a 0.6 percent rise in motor vehicle insurance and the ongoing stickiness of the housing indices.
"This is not necessarily something the Fed can cure right away," he added.
Cementing a smaller cut
Alongside the ongoing slowdown in consumer inflation, the Fed's favored inflation measure, known as the personal consumption expenditures price index (PCE), has also eased towards the bank's long-term two-percent target in recent months.
The labor market has also cooled.
Against this backdrop, Fed policymakers have shifted attention from inflation to the unemployment part of the bank's dual mandate, and indicated that rate cuts are on the way.
"The time has come for policy to adjust," Fed chair Jerome Powell said last month.
"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," he added.
A Fed rate cut next week will thrust the independent US central bank into the middle of the political debate less than two months before November's presidential election, in which the economy remains a top issue for voters.
Policymakers have been clear that the timing of rate cuts will be based on the economic data, not political considerations.
Nevertheless, a September cut could irk the Republican candidate and former US president Donald Trump, who has previously suggested without evidence that Jerome Powell -- whom he first nominated to run the Fed -- was displaying political favoritism toward the Democratic party.
Investors will now turn their attention to the upcoming Fed rate decision, which will be announced on September 18.
Futures traders are certain that the Fed will cut rates next week, but are not yet certain about the size of it, according to data from CME Group.
They assign a probability of around 85 percent that the Fed will cut by a quarter percentage-point, and a 15-percent chance that it will enact a more aggressive half-point cut.
"This report, in and of itself, is not going to deter the Fed from cutting rates," Yaros from Oxford Economics said, adding that it likely reduces the chance of a half-point cut.
"Our forecast is for a rate cut in September and December," he added. "But we have to see what the Fed says next week in their meeting."
