The consumer price index for August rose 0.2 percent month-over-month and 2.5 percent year-over-year. The monthly change matches the consensus in Econoday's survey of forecasters while the annual increase is just below the consensus of 2.6 percent. At least at the all-items level, the CPI continues to work its way lower and is nearer to the Fed's 2 percent inflation objective.

However, the core CPI excluding food and energy is less encouraging in terms of progress in disinflation. The core for August rose 0.3 percent on the month and 3.2 percent on the year. The monthly increase is a tenth above the consensus of 0.2 percent although the annual increase matches the survey consensus. Food prices edged a scant 0.1 percent higher in August from July and were up 2.0 percent year-over-year. Energy prices fell 0.8 percent in August from the prior month and were down 4.0 percent compared to August 2023.

At least in part, the core measure of prices continues to feel ongoing increases in shelter costs. The index for shelter rose 0.5 percent in August from July and the annual increase at 5.2 percent. The year-over-year increase in shelter prices had been coming down since its near-term peak of up 8.2 percent in March 2023 until, however, August's data when it rose 1 tenth on the month. The CPI for rent was up 0.4 percent in August and up 5.0 percent year-over-year. The CPI for owners' equivalent rent rose 0.5 percent month-over-month and 5.4 percent year-over year.

Excluding shelter only, the CPI was unchanged from the prior month and up 1.1 percent year-over-year. The CPI excluding food, energy, and shelter was up 0.1 percent in August from July and up 1.6 percent from a year ago.

The CPI for commodities fell 0.1 month-over-month in August and was down 1.2 percent compared to the year-ago month. The CPI for services rose 0.3 percent in August from July and was up 4.8 percent compared to August 2023. The special aggregate CPI for services less rent was up 0.1 percent in August from July and up 4.3 percent compared to August 2023.

There is plenty in this report for the FOMC to like in terms of progress on disinflation. Nonetheless, progress is still far more related to the healing in the supply chain and moderation in commodities prices rather than costs for services. Fed policymakers will not view underlying inflation as tamed despite their greater confidence that the trend is sustainably toward the Fed's inflation target. The CPI report does nothing to dampen anticipation of a 25-basis point rate cut when the FOMC meets on September 17-18, but it should counsel that a 50-basis point rate cut is unlikely.

Overall prices are expected to rise 0.2 percent in August that would match the as-expected 0.2 percent rise in July. Core prices also increased an as-expected 0.2 percent in July with August's consensus also at 0.2 percent. Annual rates, which in July were 2.9 percent overall and 3.2 percent for the core (both 1 tenth lower than June), are expected at 2.6 and 3.2 percent, respectively.

The CPI is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.