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U.S. inflation in August hit its lowest annual rate since February 2021 at 2.5%, falling from 2.9% in July and below the expected 2.6%, yet the underlying story tells a more complicated tale.

Stripping out volatile food and energy prices, core inflation pressures remain stubborn at 3.2% as shelter costs surged at their fastest monthly pace since January 2024, fueling gains in the dollar and sending Treasury yields climbing.

Expectations for a hefty 50-basis-point rate cut at the Sept. 18 FOMC meeting plummeted to just 15%, down from 34% a day earlier, as per CME Group’s FedWatch tool.

Traders now increasingly anticipate a more measured 25-basis-point cut, as sticky core inflation—particularly in services—remains a key factor under close watch by the Fed.

Energy goods and services indices saw notable monthly drops, helping to ease overall price pressures. Gasoline prices fell 0.6% month-over-month in August after holding steady in July, while electricity declined 0.7% and utility bills for piped gas services dropped 1.9%.

Market Reactions

The mixed August inflation report and the corresponding drop in investor expectation for a larger rate cut by the Federal Reserve at the September meeting triggered the following reactions in major assets:

The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY , opened Wednesday’s session 0.2% lower.

, opened Wednesday’s session 0.2% lower. Tech stocks, followed by the Invesco QQQ Trust, Series 1 QQQ were flat.

were flat. Small caps, as tracked by the iShares Russell 2000 ETF IWM , sunk 1%.

, sunk 1%. The Technology Select Sector SPDR Fund XLK was the top-performing S&P 500 sector, up 0.5%.

was the top-performing S&P 500 sector, up 0.5%. The Real Estate Select Sector SPDR Fund XLRE was the main laggard, down 1.6%.

was the main laggard, down 1.6%. The Invesco DB USD Index Bullish Fund ETF UUP rose 0.1%.

rose 0.1%. The i Shares 20+ Year Treasury Bond ETF TLT eased 0.1% as Treasury yields rose.

eased 0.1% as Treasury yields rose. Gold prices, monitored through the SPDR Gold Trust GLD , fell by 0.4%.

, fell by 0.4%. Bitcoin BTC/USD fell 2%.

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