The U.S. annual inflation rate held steady at 3.4 percent in August for the second consecutive month, matching economists’ expectations, according to the Bureau of Labor Statistics.
Core inflation, which excludes food and energy prices, slowed to 2.4 percent on a 12-month basis, also in line with market estimates.
What the data means
The Fed’s target is 2 percent, measured by the Personal Consumption Expenditures price index rather than the Consumer Price Index that the BLS reports. The CPI and PCE tend to move in similar directions, and a 2.4 percent core CPI is generally consistent with core PCE readings that are closer to but still above the target.
Inflation at 3.4 percent remains meaningfully elevated above the Fed’s goal, though it is well below the peak of more than 9 percent reached in June 2022. The core reading at 2.4 percent suggests that underlying inflation, stripped of volatile food and energy prices, is considerably closer to the target than the headline figure.
The stability of the headline rate at 3.4 percent for two consecutive months is a signal that it has not continued its earlier downward trend. A rate that stops falling can become a concern for the Fed if sustained.
The Fed context
The central bank has held its benchmark federal funds rate at elevated levels since its rate-hiking cycle began in March 2022 and concluded in mid-2023. The current rate environment is the Fed’s tool for keeping downward pressure on prices by making borrowing more expensive, which reduces consumer spending and business investment, which in turn slows inflation.
Mortgage rates and other long-term borrowing costs have risen in parallel with the Fed funds rate, and the August reading gives the central bank limited reason to begin cutting rates. The U.S.-Iran conflict has added uncertainty to the inflation outlook by pushing oil prices higher since February.
The road ahead
Economists will watch whether August’s stable reading represents a floor before a renewed decline or the start of a reversal. Each reading is a data point rather than a verdict, and policymakers have said they need to see more progress before feeling confident about lowering rates.
The September report will be the next key reading, covering price changes through the end of that month and releasing in October.
