US inflation came in line with expectations in July. The Consumer Price Index , a measure of goods and services across the country, rose 0.2% from June to July, a 2.9% gain from the same period a year ago. Core prices, which exclude the costs of food and energy, were up 0.2% month over month.

The latest data keeps the door open for a September interest rate cut as the Federal Reserve inches closer to its inflation target of 2% over the long run.

Following its most recent policy meeting , Fed Chair Jerome Powell indicated the central bank was “getting closer to the point” of cutting interest rates, although he did not elaborate on how significant that rate cut would likely be.

Why is the target set at 2%?

Inflation data has long been a precursor of Fed policy changes because of the central bank's dual mandate to promote maximum employment and price stability.

While the central bank has never explicitly defined a number for maximum employment, inflation expectations have been anchored to 2% since 2012.

David Wilcox, an economist with the Peterson Institute for International Economics and Bloomberg Economics, said that the 2% target gives the central bank ample room to adjust policy to maintain the health of the economy.

“You want a little bit of a buffer for the Fed to be able to cut interest rates when times are normal so that if the economy tips into recession, there's room for the Fed to take action against it,” Wilcox said. “You want to start out with interest rates high enough above zero so that there's latitude for the Fed to ease conditions, to lower interest rates, to bring mortgage rates down, and borrowing rates for cars.”