Stagflation Worries Grow as Inflation Rises Again

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By Yuval Rosenberg and Michael Rainey

Good evening. The nation today marked the 24th anniversary of the 9/11 attacks and continued to process the implications of the shocking assassination of conservative activist Charlie Kirk. President Trump said Thursday he will posthumously award Kirk the Presidential Medal of Freedom. Here's what else is happening.

Inflation Picked Up Speed in August as Stagflation Worries Grow

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.

 

Republicans Aim to Squeeze Dems in Funding Fight

With a government shutdown deadline looming at the end of the month, congressional Republicans and Democrats are now staking out their negotiating positions, setting up what's likely to be a tense showdown.

Congressional Republicans are reportedly preparing to vote on a "clean" short-term funding bill that would shift the deadline from September 30 to November 20, the Friday before Thanksgiving. That would ramp up pressure on Democrats to go along and avoid a shutdown, but Democratic leaders are saying they want concessions in return for help passing a funding plan.

The length of the funding extension reportedly has yet to be finalized, but the plan is to act quickly. House Appropriations Chair Tom Cole of Oklahoma told reporters that, with Congress scheduled to be out the week after next for the Jewish high holidays, the plan would be to pass a stopgap before the break. "We can do it. We're not far," Cole said, according to Politico. "But, you know, it's also hard to do it the amount of time we have, because I think I probably have to be done by the end of next week."

The Senate could potentially take up the bill next week as well.

One problem with the plan: Democrats aren't on board with it, and their votes would be needed in the Senate. House Minority Leader Hakeem Jeffries and Senate Minority Leader Chuck Schumer told reporters today that they are prepared to work on a bipartisan spending deal, but any bill to avoid a shutdown must include measures to address what they say is a brewing healthcare crisis.

Democrats are pressing for an extension of enhanced Affordable Care Act premium subsidies that are set to expire at the end of the year. The expiration of those tax credits is projected to lead to more than 4 million people losing health insurance coverage. About 22 million are expected to see their insurance premiums soar if the tax credits aren't renewed.

Democrats are reportedly also looking for concessions on the Medicaid cuts Republicans passed a couple of months ago as part of their One Big Beautiful Bill Act.

"We are together in defense of the health care of the American people," Jeffries said at a joint news conference with Schumer on Thursday. "We will not support a partisan spending agreement that continues to rip away healthcare from the American people. Period. Full stop."

Jeffries and Schumer took different approaches to a similar funding fight earlier this year, but the two Democratic leaders say they are on the same page this time.

"House and Senate, Hakeem and I are in total agreement, what the Republicans are proposing is not good enough for the American people and not good enough to get our votes," Schumer told reporters Thursday. "On this issue, we're totally united. The Republicans have to come to meet with us in a true bipartisan negotiation to satisfy the American people's needs on healthcare or they won't get our votes, plain and simple."

The outlook for that kind of deal may be grim, given that Senate Majority Leader John Thune this week indicated he will insist on a "clean" stopgap funding bill this month, leaving any discussion of healthcare subsidies for later. GOP hardliners oppose extending the enhanced subsidies.

While Republican and Democratic leaders settle on their strategies for a spending fight, they also continue to work on annual spending measures in hopes of being able to include a finalized package of three of 12 full-year bills as part of any deal. The package covers the departments of Agriculture and Veterans Affairs as well as military construction, congressional operations and the Food and Drug Administration.

"In a sign of progress," Politico notes, "House and Senate negotiators have privately reached a bipartisan deal on overall totals for each of those three funding bills, according to two people familiar with the compromise, granted anonymity to discuss the private accord."

Budget Deficit Nears $2 Trillion in First 11 Months of Fiscal Year

The federal budget deficit totaled $1.97 trillion in the first 11 months of the 2025 fiscal year, which began last October, the Treasury Department reported Thursday in its monthly statement.

It was the third-largest 11-month deficit on record, surpassed only by the pandemic years of 2020 and 2021, according to a Treasury official who briefed reporters.

In the month of August, the deficit came to $345 billion, with revenues of $344 billion and outlays of $689 billion.

The revenues include nearly $30 billion from tariffs, a reflection of President Trump's trade policy that places significant new levies on imports from countries all around the world. Relative to a year ago, before Trump's policy was put in place, tariff revenues last month were about 300% higher.

Treasury estimates that the final deficit for the full 2025 fiscal year will be a bit lower than the 11-month tally, ending below the $2 trillion mark.

"With one month left in fiscal 2025, we expect the deficit for the year to come in at $1.78 trillion, reflecting the fact that September is typically a surplus month due to strong estimated individual and corporate income tax collections," Oxford Economics economist Nancy Vanden Houten said in a research note.

Correction: Our newsletter yesterday accidentally misspelled Orem, the name of the Utah city where Charlie Kirk was killed. Send your tips and feedback to yrosenberg@thefiscaltimes.com.

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