The latest reading of the Fed's preferred inflation gauge showed that prices increased at a slower pace than expected on a monthly basis in August.

The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 0.1% from the prior month during August, below Wall Street's expectations for 0.2% and the 0.2% reading seen in July.

Over the prior year, prices rose 2.7% in August, matching Wall Street's expectations and coming in higher than the 2.6% seen in July. On a yearly basis, overall PCE increased 2.2%, its lowest annual increase since February 2021.

"We've come on a string of pretty good inflation readings over the last several months, and that was coming after an acceleration in inflation in the first quarter," PIMCO economist Tiffany Wilding told Yahoo Finance. "So I think Fed officials are pretty feeling pretty good about where inflation is sitting."

The report is the first look at inflation since the Federal Reserve cut interest rates by half a percentage point on Sept. 18. In a press conference after the decision, Powell noted the Fed now has "greater confidence" in inflation's path down the central bank's 2% target.

Powell argued that further cooling in the labor market is now as big of a concern for the Fed as inflation.

Read more: How does the labor market affect inflation?

"The upside risks to inflation have really come down, the downside risks to employment have increased," Powell said. "And because we have been patient and held our fire on cutting — while inflation has come down, I think we're now in a very good position to manage the risks to both of our goals."

Friday's data now comes as investors debate whether the Fed will cut interest rates by 25 or 50 basis points at its November meeting. Following Friday's release, investors were pricing in a 54% chance of a 50 basis point interest rate cut, above the 50% chance seen a week ago, per the CME FedWatch Tool.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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