Consumer prices rose 0.2% in August as annual inflation rate hits lowest since early 2021

Inflation in August declined to its lowest level since February 2021, according to a Labor Department report Wednesday that also showed a key measure higher than expected, setting the stage for an expected quarter percentage point rate cut from the Federal Reserve.

The consumer price index, a broad measure of goods and services costs across the U.S. economy, increased 0.2% for the month, in line with the Dow Jones consensus, the Bureau of Labor Statistics reported.

That put the 12-month inflation rate at 2.5%, down 0.4 percentage point from the July level, slightly below the estimate for 2.6% and at its lowest level in 3½ years.

However, the core CPI, which excludes volatile food and energy prices, increased 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast.

The slight uptick in core CPI keeps the Fed on defense against inflation, likely negating the probability of a more aggressive interest rate when policymakers meet next Tuesday and Wednesday.

"This isn't the CPI report the market wanted to see. With core inflation coming in higher than expected, the Fed's path to a 50 basis point cut has become more complicated," said Seema Shah, chief global strategist at Principal Asset Management.

Stocks slumped following the report, while Treasury yields were mixed. However, the market rebounded later in the day, recouping its losses as the major averages all turned positive.

In the fed funds futures market, traders priced in an 85% chance that the Federal Open Market Committee will approve a quarter percentage point, or 25 basis point, interest rate reduction when its meeting concludes Sept. 18, according to the CME Group's FedWatch measure. A month ago,