A new inflation report on Wednesday will show whether price increases continue their months-long slowdown and fall to normal levels.

Economists expect prices to have risen by 2.6 percent in the period through August, a figure that would represent a significant slowdown from the 2.9 percent annual rate recorded in the previous month.

After six consecutive months of slowing price increases, inflation is at its lowest level since March 2021. However, inflation is still nearly one percentage point above the Federal Reserve’s target rate of 2%.

Wednesday’s new price data has a significant impact on the course of the widely expected interest rate cuts.

The likelihood of a rate cut at next week’s Fed meeting is far from certain, according to the CME FedWatch tool, an indicator of market sentiment. Market observers are divided on whether the Fed will go for its usual quarter-percentage-point cut or opt for a larger half-percentage-point cut.

So far this year, labor market growth has slowed in line with falling inflation. That trend was underscored last week by a weaker-than-expected jobs report, even though employers added a solid 142,000 jobs. The unemployment rate has risen to 4.2% this year from 3.7%.

The Fed has a dual mandate: to control inflation and to maximize employment. In theory, low interest rates stimulate economic activity and promote employment, while high interest rates slow economic output and reduce inflation.

Due to recent trends, the Fed is no longer as focused on controlling inflation and is instead placing its emphasis on ensuring a healthy labor market.

Speaking at an annual meeting in Jackson Hole, Wyoming, last month, Fed Chairman Jerome Powell said the “time has come” for the Fed to adjust its interest rate policy.

In previous meetings, Powell has said the Fed needs to be confident that inflation has begun to decline sustainably toward its 2% target before it can cut interest rates. Last month, Powell seemed to suggest the Fed had achieved that goal.

“My confidence has grown that inflation is on a sustained path down to 2%,” Powell said.

Since last year, the Federal Reserve has kept interest rates at their highest levels in more than two decades. While high borrowing costs for everything from mortgages to credit card loans have helped slow the economy and reduce inflation, the policy risks plunging the U.S. into recession.

Last month, economists at Goldman Sachs raised the probability of a U.S. recession next year from 15% to 25%. However, economists disagree on whether the current economic situation is cause for serious concern.