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Inflation rose last month as the price of gas, groceries, and airfares jumped while new data showed applications for unemployment aid soared, putting the Federal Reserve in an increasingly tough spot as it prepares to cut rates at its meeting next week despite persistent price pressures.
Consumer prices increased 2.9% in August from a year earlier, the Labor Department said Thursday, up from 2.7% the previous month and the biggest jump since January. Excluding the volatile food and energy categories, core prices rose 3.1%, the same as in July. Both figures are above the Federal Reserve’s 2% target.
A separate government report Thursday showed that weekly applications for unemployment aid jumped 27,000 to 263,000, the highest in nearly four years. Requests for jobless benefits are a proxy for layoffs. Recent reports have also showed that hiring has weakened dramatically this year and was lower than previously estimated last year.
The data raises the specter of “stagflation,” a trend that last bedeviled the U.S. economy in the 1970s. The term refers to a period of slower growth, higher unemployment, and rising inflation. It is unusual because a weak economy typically keeps inflation in check.
Such a scenario could create major headaches for the Fed as it prepares for a meeting next week, when policymakers are widely expected to cut their short-term rate to about 4.1% from 4.3%. The Fed is under relentless pressure from President Donald Trump to cut rates. At the same time, stubborn inflation while the job market is weakening is difficult for the central bank because there are diverging trends that require polar reactions from Fed policymakers to address.
Typically, the Fed would cut its key rate when unemployment rises to spur more spending and growth. Yet it would do the opposite and raise rates — or at least keep them unchanged — in the face of rising inflation.
Last month, Chair Jerome Powell signaled that Fed officials are increasingly concerned about weaker hiring, setting the stage for a rate cut next week. Wall Street investors think there is an 85% chance the Fed will cut twice more after that, according to futures pricing tracked by CME Fedwatch.
“Consumer inflation came in mildly hotter than forecast, but not nearly high enough to prevent the Fed from starting to cut rates next week,” Kathy Bostjancic, chief economist for Nationwide, said. “The labor market is losing steam and reinforces that the Fed needs to start cutting rates next week and that it will be the start of a series of rate reductions.”
Where inflation heads next is a key question for the Fed. While Thursday’s report showed inflation picked up, data released Wednesday suggested prices at the wholesale level are cooling. Economists also noted that a separate measure of inflation that the Fed prefers, which will be released in about two weeks, should come in lower than Thursday’s figures and paint a more benign picture of prices.
Every month, overall inflation accelerated, rising 0.4% from July to August, faster than the 0.2% pace of the previous month. Core prices rose 0.3% for the second straight month.
Many economists and some key members of the Fed think that the current pickup in inflation reflects one-time increases from Trump’s sweeping tariffs and won’t lead to a lasting inflationary trend. They argue that a weaker job market will hold down wages and force companies to keep prices in check.
Subadra Rajappa, head of research at Societe Generale, said that while inflation was elevated last month, there were also signs that the cost of services moderated, suggesting that outside of tariffs, prices are cooling.
Yet Joe Brusuelas, chief economist at RSM, a tax and consulting firm, says that higher-income households are still spending sufficiently to push some prices higher, such as hotel and airfare costs, which leapt last month. Such spending could keep inflation stubbornly high even in a weak job market, he said.
“The Fed’s getting ready to cut into a sustained increase in prices,” he said. “Very unusual spot. ... we can see tariff-induced inflation in a slow, steady, and methodical manner.”
Goods prices picked up last month, a sign that Trump’s sweeping tariffs are pushing up costs. Gas prices jumped 1.9% just from July to August, the biggest monthly increase since a 4% rise in December. Grocery prices climbed 0.6%, pushed higher by more expensive tomatoes, apples, and beef. Rental costs also increased, rising 0.4%, faster than the previous month.
Clothing costs rose 0.5% just last month, though they are still just slightly more expensive than a year ago. Furniture costs rose 0.3% and are 4.7% higher than a year earlier.
Some restaurant owners have boosted prices to offset the rising costs of food. Cheetie Kumar, who owns Mediterranean eatery Ajja in Raleigh, North Carolina, said she’s facing higher costs on everything ranging from spices she imports from India, coffee and chocolate she gets from Brazil, and soy she gets from Canada.
“Those are things that I cannot source locally. We do source a lot of produce and meat and everything else from local farmers, but I don’t know any nutmeg growers in North Carolina,” she said.
Her overall costs are up about 10% from a year ago, with beef costs up 7%, and much bigger increases for things like coffee, chocolate (300%), and spices (100%).
She’s raised prices on some of her menu items by $1 or $2, but said she’s at the limit of how much she can do so before demand wanes and she stops earning a profit.
Bigger companies are also feeling the pinch.
E.L.F. Cosmetics said this spring that it was raising prices by $1. Last month, however, CFO Mandy Fields said it is no longer certain whether the $1 price increases will be enough to offset rising tariff costs.
Shoppers have yet to feel the big sting economists predicted earlier in the year after many retailers ordered goods ahead of tariffs, and who also have absorbed a big chunk of the costs rather then passing them along to consumers grown increasingly leery of price increases.
But Walmart and other big chains have warned of costs increases as they replenish their inventories, with the full impact of tariffs in effect.
Over the years, many Fed officials I’ve talked to have told me their nightmare scenario isn’t a recession. And even after the devastating bout of post-pandemic inflation threatened their credibility, they don’t say price pressures alone are what keep them up at night.
What they fear is the combination of both: When prices are rising, employment is faltering, and policymakers are forced to take a side. The worst of both worlds.
Economists call it “stagflation,” and it’s exactly what many are taking away from the latest CPI report. Inflation rose the most since January, climbing 2.9% year-over-year and 0.4% month-over-month. Strip out food and energy, and core prices are stuck at 3.1% — matching the highest since February. Just a few months ago, in April, inflation looked within arm’s reach of the Fed’s 2% target (2.3%). Core prices had eased to 2.8%.
But the other side of the Fed’s dual mandate is flashing warning signs now, too. The U.S. economy added just 22,000 jobs last month. New filings for unemployment insurance rose to the highest since June. Job cuts aren't just in white-collar industries or government anymore. They're happening in the construction and manufacturing sectors now, too. Unless you’re in healthcare or AI, the job market feels tough.
That’s why officials are leaning toward a rate cut in September. The harder question they're going to start debating: how much conviction do they really have to keep cutting, as inflation inches further away from target?
It's a delicate balancing act. Keep rates too high for too long, and you risk pushing more Americans out of work. Cut too quickly, and you risk inflation sticking higher for longer, setting the stage for more painful decisions down the road.
Doves see the latest inflation jump as transitory — the byproduct of tariffs — and argue the real danger is the weakening labor market. Hawks fear déjà vu: another wave of entrenched inflation, like the 1970s, if the Fed moves too soon. The rest of the FOMC falls somewhere in the middle, but none will know who’s right until much later, when the data revisions roll in.
Translation: Don’t expect the Fed to cut rates as aggressively as some might hope, even if the economy looks shaky.
What do you think is the bigger risk over the next year — meaningfully higher inflation or meaningfully weaker job growth?
US household net worth rebounded in the second quarter as stock prices climbed to a fresh high.
Household net worth jumped $7.1 trillion, or 4.2%, from the prior quarter to $176.3 trillion, a Federal Reserve report showed Thursday. The value of Americans’ equity holdings rose $5.5 trillion, and the value of real estate also climbed.
The S&P 500 Index finished the first half of the year on a strong note, fueled by artificial intelligence as well as general optimism around tariff delays and potential deals with major US trading partners. The months-long rally drove stock prices to a fresh record high.
The value of real estate holdings increased $1.2 trillion, the first increase in a year.
The Fed’s report showed that consumer borrowing rose at a 3.8% annualized pace, the fastest pace in almost three years. Growth in consumer non-mortgage credit advanced by the most since 2023, while mortgage debt also picked up.
Growth in business debt outstanding stepped down. In the public sector, state and local government debt surged by the most since 2007. Federal debt rose at the slowest pace since 2017.
In another grim sign for the U.S. labor market, jobless claim applications jumped to their highest level in almost four years last week, virtually assuring the Federal Reserve will cut its benchmark interest rate next week.
The number of Americans filing for unemployment benefits for the week ending Sept. 6 rose by 27,000 to 263,000, the Labor Department reported Thursday. That’s the most applications since the week of Oct. 23, 2021, and well above the 231,000 new applications economists forecast. It’s also the biggest week-to-week increase in almost a year.
Most analysts were already forecasting an interest rate cut after Fed Chair Jerome Powell signaled as much at a conference of central bankers three weeks ago. However, another report on Thursday showing that consumer inflation remains elevated could complicate the Fed’s dual mandate of keeping prices in check while supporting a healthy labor market.
Typically, the Fed would cut its key rate when unemployment rose in an attempt to spur more spending and growth. But it would do the opposite and raise rates — or keep them unchanged — in the face of rising inflation.
“The hot inflation print will not likely change the Fed’s plan to cut rates in September, but it’s possible the Fed will hold in October if inflation expectations no longer look well-contained,” said Jeffrey Roach, chief economist for LPL Financial.
Fed officials recently have expressed greater concern about the deteriorating labor market than inflation, and while a rate cut could spur economic growth and boost the job market, economists fear it could push inflation even farther above the Fed’s target of 2%.
Earlier this week, the Bureau of Labor Statistics issued a massive preliminary revision of U.S. job gains for the 12 months ending in March, further evidence that the labor market has not been as strong as previously thought.
The BLS’s revised figures showed that U.S. employers added 911,000 fewer jobs than originally reported in the year ending in March 2025, with the biggest weakness coming from the leisure and hospitality sector, professional and business services, and retail. The report showed that job gains were tapering long before President Donald Trump rolled out his far-reaching tariffs on U.S. trading partners in April.
The department issues the revisions every year, intending to better account for new businesses and ones that had gone out of business. Final revisions will come out in February 2026.
The updated figures came after the agency reported Friday that the economy generated just 22,000 jobs in August, well below the 80,000 economists were expecting.
Also last week, the government said that U.S. employers advertised 7.2 million job openings at the end of July, fewer than economists had forecast, and the first time since April of 2021 that there were more unemployed Americans than job postings.
Last month’s July employment report, which showed job gains of just 73,000 and included huge downward revisions for June and May, sent financial markets spiraling and prompted Trump to fire the head of the agency that compiles the monthly data.
The various labor market reports have bolstered fears that Trump’s erratic economic policies, including the unpredictable taxes on imports, have created so much uncertainty that businesses are reluctant to hire.
Broader U.S. economic growth has weakened so far this year as many companies have pulled back on expansion projects amid the uncertainty surrounding the impacts of the tariffs. Growth slowed to about a 1.3% annual rate in the first half of the year, down from 2.5% in 2024.
Thursday’s unemployment benefits report showed that the four-week average of claims, which evens out some of the week-to-week volatility, rose by 9,750 to 240,500.
The total number of Americans collecting unemployment benefits for the previous week of Aug. 30 was unchanged at 1.94 million.
Weekly applications for jobless benefits are considered a proxy for layoffs and have mostly settled in a historically low range between 200,000 and 250,000 since the U.S. began to emerge from the COVID-19 pandemic nearly four years ago.