Inflation heats up as Fed faces pressure from Trump, labor market to cut rates

Inflation accelerated in August, according to data released Thursday by the Labor Department, complicating the Federal Reserve’s efforts to balance interest rates amid intense political and economic pressure.

The consumer price index (CPI) rose 0.4 percent last month, up from a monthly gain of 0.2 percent in July, and 2.9 percent over the past 12 months. The numbers were in line with the expectations of economists.

The new inflation data comes less than a week before the Fed’s monetary policy committee is set to meet in Washington, D.C.

The Fed is expected to cut interest rates for the first time this year, after a steep slowdown in the job market. But the rising inflation could boost the risks of stagflation, in which prices rise and the economy weakens at the same time.

The biggest movers in the CPI for August were shelter and food. The shelter index increased by 0.4 percent on the month, and food prices advanced by 0.5 percent to hit an annual increase of 3.2 percent in August.

Grocery prices increased by 0.6 percent after falling 0.1 percent in July. Meat prices were 5.6 percent more expensive than last year, beverages were up 4.6 percent, and fruits and vegetables were up 1.9 percent.

The overall increase in prices in August meant real wages were down on the month by 0.1 percent, with inflation outpacing wage growth. Real average hourly earnings were $11.30, slightly up from last August at $11.22.

Analysts said Thursday that the increase in inflation will be overshadowed in the Fed’s thinking by the slowing employment situation.

“Today’s CPI report has been trumped by the jobless claims report,” Seema Shah, head strategist with Principal Asset Management, wrote in a commentary. “While the CPI report is a tad hotter than expected, it will not give the Fed a moment of hesitation when they announce a rate cut next week.”

They also saw tariffs, which factor as added costs for companies, showing up in the price increases.

“We are seeing evidence of more tariff pass through,” Brian Coulton, chief economists with Fitch Ratings, wrote Thursday. “Core goods prices increased by 0.3 percent in August, up from  0.2 percent in June and July, and were up by 1.5 percent [yearly] — the fastest rate since May 2023.”

The latest jobs report showed the economy added just 22,000 jobs, bringing the three-month average down to 29,000 across June, July, and August. The unemployment rate ticked up to 4.3 percent from 4.2 percent in August, with unemployed people outnumbering available jobs for the first time since 2021.

Fed Chair Jerome Powell called the deceleration in employment “curious” in a speech last month, as both the demand and supply of available workers has been coming down in tandem. He also said there are now more downside risks in the employment situation, which can compound quickly.

Businesses have been holding off on hiring and investment due to policy uncertainties driven by stop-and-start tariffs from the White House. At the same time, the administration’s immigration crackdown has diminished the supply of available workers.

The Congressional Budget Office (CBO) reported Wednesday that Trump’s One Big Beautiful Bill Act is expected to shrink the U.S. population by hundreds of thousands of people. By 2035, there will be 320,000 fewer people in the U.S. subject to Social Security and 280,000 fewer people who aren’t in prison, the military or in long-term medical care, the CBO said.

This could affect the level of full employment in the economy, which the Fed considers when adjusting short-term interest rates.

“Potential employment growth, meaning employment growth when the labor market is operating sustainably at ‘full employment,’ could be between 10,000 and 40,000 jobs a month in the second half of 2025 – down from 140,000 to 180,000 in 2024,” economists for the American Enterprise Institute, a Washington think tank, wrote in July.

Updated at 9:27 a.m. EDT