(Reuters) – U.S. economic activity expanded more slowly from mid July through late August and businesses reported less hiring, signals that underscore why the Federal Reserve is set to lower interest rates later this month.

The U.S. central bank's latest temperature check on the health of the economy also showed that inflation pressures increased at a modest pace.

"Economic activity grew slightly in three Districts, while the number of Districts that reported flat or declining activity rose from five in the prior period to nine in the current period," the Fed said on Wednesday in the survey known as the "Beige Book," which polled business contacts across the central bank's 12 districts through Aug. 26. "Employers were more selective with their hires and less likely to expand their workforces, citing concerns about demand and an uncertain economic outlook."

The analysis, released roughly every six weeks, comes as Fed Chair Jerome Powell and his colleagues have made clear they intend to cut interest rates from the current 5.25%-5.50% range, where they have been for more than a year, at their next policy meeting on Sept. 17-18. The only uncertainty is if weakening labor market conditions merit a quarter percentage point cut or a larger-than-normal half percentage point reduction.

The Fed is trying to engineer a so-called "soft landing" for the economy in which economic growth gradually slows and the unemployment rate remains relatively low even as inflation, which spiked to a 40-year high two years ago, returns to the central bank's 2% target rate.

After being stung by higher-than-expected inflation in the first part of this year the pace of annual price increases came down, by the Fed's preferred measure, to 2.5% in July and officials are increasingly confident they will reach their goal.

Instead, attention has turned to a jump in the unemployment rate to a near three-year high of 4.3% in July, the fourth straight monthly rise in the jobless rate, amid increasing concern that high borrowing costs may be overdampening demand for labor.

So far the slowdown in the job market has been mostly driven by a step down in hiring rather than layoffs. Job openings dropped to a 3-1/2-year low in July, data earlier on Wednesday showed.

Five Fed districts reported slight or modest rises in overall headcounts, but a few districts said firms "reduced shifts and hours, left advertised positions unfilled, or reduced headcounts through attrition." Layoffs, however, remained low.

Investors currently expect the Fed to lower borrowing costs in September, November and December this year.

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)