"Fed Whisperer" Nick Timiraos wrote on Wednesday in the United States after the release of the August CPI report that the inflation rate fell to a three-year low in August, which will prompt the Fed to begin gradually cutting interest rates at next week's meeting.

According to the data from the US Department of Labor, the US CPI rose by 2.5% year-on-year in August, lower than 2.9% in July, marking the fifth consecutive month of cooling. Excluding the highly volatile food and energy costs, the core CPI's year-on-year growth rate remained roughly stable at 3.2%.

In contrast, economists surveyed by The Wall Street Journal had previously expected overall inflation to rise by 2.6% compared to the same period last year, with core prices rising by 3.2%.

After the release of the report, major US stock indices edged lower, with the Dow leading the decline. US Treasury yields edged higher, but lingered near this year's lowest levels.

Stronger housing inflation in August resulted in slightly stronger core inflation growth than expected, which may make it more difficult for officials to push for a larger 50 basis point interest rate cut at next week's Fed meeting. Traders on Wednesday increased their bets on the Fed's policy easing at a more moderate pace.

Many Fed officials have already indicated their readiness to cut interest rates, and Wednesday's CPI report will not change this outcome. However, some officials had not completely ruled out the possibility of a larger rate cut instead of the more traditional 25 basis points cut.

The rise in food prices slowed down in August, while prices of used cars and energy fell from the previous month. The intensified selling in the oil market indicates that oil prices will continue to decline in the coming weeks, which is a key factor in the reversal of Americans' views on the US economy.

For voters who have not yet decided whether to support Vice President Harris or former President Trump, the economy is a major issue. Inflation in the past few years has been a big weakness for Democrats, and voters have consistently listed rising energy, food, and housing prices as their top concerns.

Investors are currently trying to analyze the health of the US economy as it has slowed down from the rapid growth seen after the COVID-19 pandemic, when employers rushed to reopen and hire new employees.

The easing of inflation provides a relief for households burdened by costs. However, the labor market has cooled down with hiring and wage growth slowing down, average unemployment rate rising, and longer job search times.

Due to high interest rates, Americans are waiting for relief from lower mortgage, auto loan, and credit card rates, and major retailers are adapting to more bargain-seeking shoppers. Target significantly lowered prices last quarter to boost sales, while Amazon reported that more and more customers are looking for discounts and lower prices on necessities.

However, despite consumers looking for discounts, they have not stopped spending.

"We haven't seen any deterioration in consumer health," said John David Rainey, CFO of Walmart, during a recent earnings call.

Businesses and investors will closely watch the Federal Reserve's meeting next week, whether it's the scale of rate cuts or Fed Chair Powell's view on the health of the economy.

Editor/Lambor