Inflation in the United States picked up in August as companies passed the cost of Donald Trump’s tariffs onto consumers, adding to the pressure on households already facing higher living costs.
The consumer price index (CPI), which measures the cost of a wide range of goods and services, rose 2.9% over the past year — the sharpest increase since January. Core inflation, which excludes food and energy, held steady at 3.1% after climbing in July.
Investors Expect a Fed Rate Cut
Despite the slight rise in prices, investors are betting that the Federal Reserve will move to cut interest rates when policymakers meet on 17 September. Wall Street is widely anticipating a quarter-point reduction from the current 4.25% to 5.5% range, pointing to signs of a cooling economy.
Confidence grew after the producer price index, which tracks wholesale prices, dipped in August following a steep rise in July. That decline gave investors hope that consumer inflation, while still above target, is climbing only gradually.
Fed Faces Political and Economic Pressure
The Fed has held back from cutting rates over the past year, wary of the turbulence caused by trade and immigration policies. Its goal remains to bring inflation back to 2%, a level not seen since early 2021.
At the central bank’s annual Jackson Hole symposium last month, chair Jerome Powell signalled that a shift may be coming. He said economic conditions “may warrant adjusting our policy stance” — words that many in the markets took as a hint of imminent rate cuts.
Powell noted that while tariffs were nudging prices higher, the greater concern was a softening jobs market. “The downside risks to employment are rising,” he warned. “If those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
Labour Market Weakens
Recent data has raised fresh doubts about the strength of the US labour market. In August, the Bureau of Labor Statistics revised down job creation figures for May and June by a combined 258,000 positions.
The White House criticised the BLS for the revisions, but many economists said uncertainty created by tariffs had disrupted business planning and slowed hiring.
The trend continued last week when June’s job figures were adjusted again, pushing employment growth into negative territory for the first time since late 2020. The unemployment rate also rose to 4.3%, its highest in nearly four years.
A Delicate Balancing Act
The Fed now faces a difficult choice. Cutting rates could support the slowing jobs market, but looser policy risks fuelling inflation just as tariffs drive costs higher. For Powell and his colleagues, the decision will be about striking a balance between stabilising prices and preventing deeper weakness in employment.
Markets remain hopeful that the Fed will opt for a rate cut, giving the economy a short-term boost. But with inflation still above target and unemployment on the rise, next week’s decision could set the tone for the months ahead.
