The war on inflation is mostly won — with one big exception. Without hot housing prices, the CPI would look even better.

Why it matters: That is not enough to prevent the Federal Reserve from lowering interest rates next week. However, it is evidence there's still at least one strong inflationary force in the economy — which may be enough to quiet talk of an aggressive pace of rate cuts.

• The housing price pressure, especially if continued, means inflation data still warrants at least some attention, even as the Fed pivots toward greater concern about the labor market.

What they're saying: "[T]he hawks on the committee will likely seize on today's CPI report as evidence that the last mile of inflation needs to be handled with care and caution," Seema Shah, chief global strategist at Principal Asset Management, wrote this morning.

• That might suggest the Fed will cut rates for the first time since 2020 by a quarter-percentage point at its policy meeting that concludes a week from today, instead of opting for a larger half-point cut.
• Chances of a larger cut plummeted after the report's release, with the CME FedWatch tool putting 15% odds on that, down from 34% yesterday.

The big picture: Overall CPI rose 0.2% last month, matching July's increase. During the 12 months through August, CPI increased 2.5% — the smallest increase since February 2021.

• Core CPI, which excludes energy and food prices, rose 0.3% in August, a tick higher than the prior month. It increased 3.2% in the year ending in August, the same as July.
• That said, over a shorter time horizon, even core inflation looks well-behaved: On a three-month annualized basis, it's up 2.1%, right at the Fed's 2% inflation target (arguably a bit below it, because CPI runs higher than the measurement favored by the Fed).

Yes, but: Inflation would look even more benign if it weren't for shelter prices, which economists have long expected to cool based on private sector data. After a few head fakes, that still does not appear to be the case.

• Shelter accounted for more than 70% of core CPI's gain in the 12 months ending in August. Core CPI would have increased just 0.1% last month if shelter prices were excluded, according to investment firm Brean Capital.

By the numbers: Overall shelter prices rose 0.5%, the fastest monthly gain since January.

• Rent prices and owners' equivalent rent — which gauges how much it would cost homeowners to rent their homes — rose by a similar amount, speeding up from the pace in prior months.
• "Housing is the sole remaining driver of our inflationary worries," Morningstar senior U.S. economist Preston Caldwell wrote this morning.
• In a blog post this morning, White House economists wrote "the pressure from housing on overall inflation has been ongoing and is clearly related to the very tight housing market and the decade-in-the-making shortage of affordable housing."

The bottom line: Affordable housing has emerged as a top issue among voters in the upcoming election. The data confirms their concerns.

In advance of a likely Fed rate cut next week, its counterpart across the Atlantic looks set to make a move of its own tomorrow.

Driving the news: The European Central Bank is widely expected to cut its target interest rate by a quarter-point tomorrow following a meeting of its governing council. The announcement is due at 2:15pm Frankfurt time, or 8:15am ET.

• It would be the second ECB rate cut of this cycle, after the bank cut its main deposit rate for countries using the euro currency by a quarter point, to 3.75%, in June.
• It reflects Eurozone inflation that has receded significantly, to 2.2% for the year ended in August, near the ECB's target.

Between the lines: Investors will pay particular attention to any signals about the path of rate cuts from there.

• ECB president Christine Lagarde has avoided sending explicit signals about the bank's plans in recent months, swapping the practice of "forward guidance" about policy for a stance of making decisions meeting-by-meeting, contingent on data.
• Still, the practice of chopping rates by a quarter point at every other policy meeting looks to be the most likely baseline unless the European economy starts to buckle.