The inflation report dashes hopes of a jumbo rate cut next week

• Headline inflation cooled as expected in August, rising 2.5% from a year ago.
• But core inflation came in hotter than expected, driven by housing costs.

Inflation slowed in August in line with expectations.

The consumer price index, published by the Bureau of Labor Statistics, increased 2.5% over the year from August 2023 to this past August, matching the forecast of 2.5% and below July's 2.9% rate.

But the core CPI reading rose unexpectedly to 0.3%, from 0.2% the previous month, driven by higher housing costs.

The new data will factor into the Federal Open Market Committee's interest-rate decision next week, with the hot core figure decreasing the odds of a jumbo 50-basis-point cut.

The CME FedWatch tool — which calculates the market's probabilities for rate cuts of specific sizes — is now assigning just a 15% likelihood to a bigger move, down from where it was after the August jobs report.

Softening but still relatively strong labor market data will also weigh on the Fed's decision. Data from the Bureau of Labor Statistics out last Friday showed unemployment dropped from 4.3% in July to 4.2% in August, and monthly job growth has cooled during the summer.

"The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market," Fed Chair Jerome Powell said in a July press conference following the FOMC policy interest rate decision. "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

Powell also said during that conference that "we will be data dependent but not data point dependent, so it will not be a question of responding specifically to one or two data releases."

This is a developing story. Please check back for updates.