Inflation eased in August to new three-year lows, teeing up the Federal Reserve to begin gradually reducing interest rates at a meeting next week.

The consumer-price index climbed 2.5% from a year earlier, according to the Labor Department, decreasing from 2.9% in July and extending its cooling streak to five months. Core inflation, a measure that excludes volatile food and energy costs, held roughly steady at 3.2%.

Economists surveyed by The Wall Street Journal had expected overall prices to have risen 2.6% from a year ago, as well as a 3.2% increase in core prices.

Major stock indexes veered lower after the report, led by a 1.7% decline in the Dow Jones Industrial Average. Treasury yields wavered near their lowest levels of the year.

Firmer shelter inflation that contributed to somewhat stronger-than-anticipated core price increases in August will likely make it harder for officials to push for a larger half-percentage-point rate cut at next week’s Fed meeting. Traders on Wednesday ramped up bets that the Fed will ease policy at a more moderate pace.

Many of the central bankers have signaled they are prepared to cut rates, and Wednesday’s consumer-price index reading won’t change that outcome. But some officials hadn’t entirely ruled out the prospect of a larger cut, as opposed to a more traditional reduction of a quarter percentage point.

Cost increases for food slowed in August, while used vehicles and energy were cheaper than a month earlier. An intensifying selloff in oil markets suggests prices at the pump will continue to decline in the coming weeks, a key reversal in pressures that have colored Americans’ views of the U.S. economy.

Source: Inflation Extends Cooling Streak to Hit 2.5% in August – WSJ