Inflation jumps to 2.9% in August as jobless claims surge, muddying Fed outlook

Consumer prices in the US rose at a faster pace in August, with the annual inflation rate reaching 2.9%, the highest level since January.

The latest data from the Bureau of Labor Statistics, released Thursday, showed that Americans are continuing to pay more for essentials such as food, housing, and energy, adding fresh complexity to the Federal Reserve’s policy outlook ahead of its meeting next week.

The consumer price index increased 0.4% on a seasonally adjusted basis from July, outpacing economists’ expectations of a 0.3% gain.

The core measure, which excludes food and energy, rose 0.3% for the month and 3.1% over the past year, both in line with forecasts. Shelter costs, which make up about one-third of the index, contributed the most to the monthly increase, while food and energy prices also saw notable gains .

At the same time, the labor market showed signs of strain. A separate data pack from the BLS showed weekly jobless claims rose sharply to 263,000 for the week ending September 6, the highest level in four years and well above the estimate of 235,000. The spike in unemployment filings, alongside persistent inflation, presents a mixed picture for policymakers as they weigh their next move on interest rates .

Market participants are widely expecting the Fed to lower its benchmark interest rate, currently set between 4.25% and 4.5%, at the conclusion of its two-day policy meeting on September 17. While a quarter-point cut is seen as likely, some investors are watching for the possibility of a larger move in response to labor market weakness and subdued inflation readings earlier in the year .

Josh Jamner, senior investment strategy analyst at ClearBridge Investments, noted the unusual dynamic in Thursday’s data.

“For the first time in a long time, CPI is being overshadowed on its release day by another data series: initial jobless claims,” Jamner said, adding that the spike in initial claims, which hit their highest level in four years, “helped briefly push the 10-year Treasury below 4% this morning, despite a larger than expected increase in the consumer price index.”

He said that the Federal Reserve’s focus on maximum employment means today’s inflation print is “not hot enough in our view to derail a 25 bps interest rate cut at next week’s FOMC meeting.”

While he sees a still-gradual passthrough of higher tariffs on to higher prices of goods, Jamner also cautioned that if the rise in jobless claims continues, investors “may turn more cautious on the economic outlook.”

Chris Zaccarelli, chief investment officer for Northlight Asset Management, said the Fed’s path is clear in the short run, but persistent core inflation could complicate future decisions.

"It’s surprising to see how quickly the narrative has shifted from before last week’s jobs report from whether or not there will be a cut in September, to how many cuts we will see after there is definitely a cut in September," Zaccarelli said.

He observed that “the 0.4% month-over-month inflation rate is much too high for a sustained rate cutting cycle and it will now be an issue of how many more times can the Fed cut if inflation does not head toward their 2.0% year-over-year target.”

The inflation data also reflected ongoing effects from tariffs, with companies such as Hormel Foods and Ace Hardware raising prices due to higher input costs. Vehicle prices, particularly for new cars, saw increases attributed to tariff pressures, while used car prices also climbed .

With inflation expectations among consumers ticking up to 3.2% for the coming year, the Federal Reserve faces a delicate balance as it considers how aggressively to respond to evolving economic signals in the months ahead .