Inflation moved higher in August, as consumer prices rose at the highest rate in seven months, the Labor Department announced Thursday. A separate report showed that initial filings for unemployment assistance jumped last week, rising to the highest level since 2021. Together, the new data add to concerns that stagflation could be brewing in the U.S. economy, raising the specter of higher inflation and rising unemployment at the same time.
The Consumer Price Index rose 2.9% over the last 12 months, up from 2.7% in July and the recent low of 2.3% in April. Core CPI, which ignores volatile food and fuel prices, rose 3.1%, matching the previous reading. The results were largely in line with expectations.
Meanwhile, the number of people filing for jobless benefits last week rose by 27,000 to 263,000, the highest tally since the week of October 23, 2021. It was the largest weekly increase in nearly a year, and above economists’ expectations of about 230,000 applications.
Tariffs in focus: While the effect of President Donald Trump’s tariff increases on U.S. trade partners around the world is still being debated, many analysts said they are beginning to show up, particularly in the inflation data.
“Slowly—quite slowly in fact—but surely, we are seeing evidence of more tariff pass-through,” Brian Coulton, chief economist at Fitch Ratings, told Bloomberg.
J.P. Morgan's Michael S. Hanson offered a similar analysis. “Tariff pass-through into consumer prices is ongoing but still fairly moderate; a combination of anecdotal evidence (including firms’ own guidance) and survey data suggest further increases are likely, although perhaps somewhat more gradually than previously thought,” he wrote in a research note. “As such, we continue to anticipate additional firming of consumer inflation readings in coming months.”
Heather Long, chief economist at Navy Federal Credit Union, was a bit gloomier. “The middle-class squeeze from tariffs is here,” she wrote on social media. “It’s troubling that so many basic necessities are rising in price again: Food, gas, clothing and shelter all had big cost jumps in August. And this is only the beginning.” In one particularly alarming example, Long said the price of coffee has risen 21% in a year.
All eyes on the Fed: Thursday’s data send mixed signals, pointing to both higher inflation and a weakening labor market. In isolation, the Federal Reserve would typically respond to those issues in opposite ways, raising rates to fight inflation and lowering them to boost a softening economy. Recent commentary from Fed officials suggests they are now more concerned about the labor market, clearing the path for a widely anticipated rate cut at their meeting next week. But the hotter inflation numbers might mean there are fewer cuts after that.
“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,” Jeffrey Roach, chief economist for LPL Financial, told the Associated Press.
On the other hand, Kathy Bostjancic, chief economist for Nationwide, said the weakness in the labor market could remain the dominant factor moving forward. “Consumer inflation came in mildly hotter than forecast, but not nearly high enough to prevent the Fed from starting to cut rates next week,” she 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.”
The bottom line: Inflation is still well below its pandemic-era peak, and few economists expect to see it return to those levels. But inflation is no longer moving down toward the Fed’s 2% target rate, and is instead climbing modestly, driven higher in part by the tariff increases put into place earlier this year.