The Federal Reserve's preferred inflation metric grew at its slowest pace on a monthly basis since late 2020 during August, new government data showed.

The Personal Consumption Expenditures (PCE) Index grew 3.5% year over year in August, up from 3.4% the month prior and in line with expectations. "Core" PCE, which excludes the volatile food and energy categories, grew 3.9%, down from 4.1% from the month prior and in line with what economists surveyed by Bloomberg had expected.

Month-over-month, core PCE rose 0.1% in August, down from 0.2% in July, and the lowest rate since November 2020.

"It's about as good as you could expect," Moody's analytics chief economist Mark Zandi told Yahoo Finance Live. "0.1%, that's a really marvelous number. I'm sure it's overstating the case, I don't think it pushes all the way back into the Fed's target [2%] quite yet, but all the trend lines there look good."

Core PCE is the inflation measurement most often mentioned by Fed Chair Jerome Powell, who noted last Wednesday that inflation remains "well above our longer-run goal of 2%." The comments came after the Fed maintained rates in a range of 5.25%-5.50%, the highest level since March 2001, while also forecasting holding interest rates higher for longer than anticipated in an effort to tame inflation.

After today's print, markets are now pricing in a 67.2% chance the Fed doesn't raise rates again this year, up from a 57.7% chance a week ago, per the CME FedWatch tool.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

August's PCE reading falls in line with the month's Consumer Price Index, another closely watched inflation measure, which also showed cooling core price increases. August's CPI report showed headline inflation was 3.7%, also driven by higher oil and food prices.

The Federal Reserve revealed in its Summary of Economic Projections (SEP) that it expects core PCE to fall quicker than initially expected this year. The SEP indicated the Federal Reserve sees core inflation peaking at 3.7% this year — lower than June's projection of 3.9% — before cooling to 2.6 % next year and 2.3% in 2025.

But Powell acknowledged during the subsequent press conference that a rise in core PCE isn't the only thing that could drive another interest rate hike this year. The Fed is also closely following any economic developments that could stifle inflation's path downward.

"The heat that we see in GDP, is it really a threat to our ability to get back to 2% inflation? That's going to be the question," Powell said. "It's not a question about GDP on its own."