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In August, Inflation edged closer to the Federal Reserve’s target, potentially paving the way for future interest rate cuts, according to a report from the Commerce Department. The personal consumption expenditures price index, a key measure for the Fed to gauge the cost of goods and services in the U.S. economy, rose 0.1% for the month, resulting in a 12-month Inflation rate of 2.2%, lower than the previous month and the lowest since February 2021.

Economists had anticipated a slight increase in the all-items PCE for the month and a 2.3% rise from a year ago. Excluding food and energy, core PCE also increased by 0.1% in August and was up 2.7% from a year ago. This 12-month figure was slightly higher than in July. Fed officials typically pay more attention to core Inflation as a more accurate measure of long-term trends.

Personal income and spending figures for the month fell slightly short of estimates, with income increasing by 0.2% and spending rising by 0.2%. Despite these numbers, stock market futures were positive, and Treasury yields were negative following the report.

The progress in Inflation in August occurred despite ongoing pressure from housing-related costs, which saw a significant increase. Services prices rose by 0.2%, while goods saw a decline of 0.2%. The recent interest rate cut by the Fed marked the first time since March 2020 and was a larger move than usual.

In light of recent developments, Fed officials have shifted their focus from fighting Inflation to supporting the labor market, which has shown signs of softening. Policy makers signaled a likelihood of further interest rate cuts this year and in 2025, with markets expecting a more aggressive approach.

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