Investing.com -- Headline US consumer prices rose by 0.2% on a monthly basis in August, matching July's rate, but the core figure accelerated slightly, potentially denting the chances that the Federal Reserve will introduce a more aggressive cut to interest rates at its upcoming policy gathering.
The month-on-month headline US consumer price index met economists' expectations, along with the annual figure, which slowed to 2.5% from 2.9% in July.
Meanwhile, so-called "core" consumer prices, which strip out more volatile items like food and fuel, edged up by 0.3% month-on-month, faster than estimates of 0.2%. Year-over-year, the reading came in at 3.2%, in line with forecasts and equaling July's pace.
The inflation figures come as investors widely expect the Fed to bring borrowing costs down from a 23-year high of 5.25% to 5.5% at its next two-day meeting from Sept. 17-18.
Yet uncertainty has continued to cloud over the scope of a potential Fed rate cut, with investors unsure if policymakers will roll out a 25-basis point reduction or a deeper 50-basis point slash. Any signs of stubborn inflationary pressures could persuade the central bank to take a more measured approach to possible cuts.
"Investors will dial back expectations for a [50-basis point] cut next week and the knee-jerk reaction in stocks and bonds will be to the downside, but we don’t think this inflation report will dramatically shift the Fed’s mindset," analysts at Vital Knowledge said in a note to clients.
US stock futures pointed lower in the wake of the inflation report, while the rate-sensitive 2-year Treasury yield, which moves inversely to prices, inched higher.
According to the CME Group's (NASDAQ:CME) closely-monitored FedWatch Tool, the probability that policymakers will reduce rates by a quarter-point has risen to 85%, while the chances of a half-point decrease have fallen to 15%. Prior to the data, markets saw the numbers at 67% and 33%, respectively.
Even still, analysts have noted that the central bank's major focus is likely on pivoting from reining in price gains to protecting the health of the American labor market.
Speaking in August, Fed Chair Jerome Powell said that the "time has come" to adjust monetary policy due to potential "downside risks" facing the US jobs market.
Other Fed officials have voiced similar sentiments. In an interview with Reuters, San Francisco Fed President Mary Daly argued that if the Fed's monetary policy became "overly tight" it could lead to "additional slowing" in the US employment picture.
"[T]o my mind, that would be unwelcome," she said, according to Reuters.
A crucial nonfarm payrolls report last week showed that the US economy added fewer jobs than anticipated in August, but rose from a sharply revised July reading. The release also found that the unemployment rate met estimates of 4.2%, compared to July's mark of 4.3%.
According to separate data, US private employers hired the fewest number of workers since 2021 in August, while job openings dipped to a 3-1/2-year low in July. But worries over a deterioration in the American labor market were somewhat soothed by other figures showing a decline in jobless claims and expansion in services sector activity.
Analysts at Bank of America said that, "beyond the first cut" anticipated this month, labor market and activity data will be a "more important determinant of the pace and depth of the cutting cycle than inflation."
"In other words, the Fed’s reaction function is starting to put more emphasis on its other mandate – maximum employment," the analysts added.