Inflation showed an uptick in August, as reported by government data on Thursday. Investors are closely monitoring how President Trump’s tariffs are impacting consumer prices and what this might mean for the Federal Reserve’s approach to interest rate adjustments.
According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose by 2.9% annually in August, up from July’s 2.7% increase and aligning with economist predictions. On a monthly basis, prices increased by 0.4%, an increase from July’s 0.2%, surpassing expectations of a 0.3% gain. This monthly rise was largely driven by stubborn gasoline prices and rising food costs.
Core inflation, which excludes food and energy, maintained a year-over-year increase of 3.1% in August, unchanged from July and matching forecasts. On a monthly basis, core prices rose by 0.3%, consistent with July’s increase—marking the most significant monthly rise in six months.
The report emerges as the Fed deliberates its next interest rate move. Despite the persistent inflation in August, markets are still anticipating a quarter-point cut at next week’s policy meeting, according to the CME FedWatch tool. Recently revised data indicated that the US economy added 911,000 fewer jobs over the 12 months ending in March 2025 than previously thought, raising expectations for a more aggressive rate cut.
In light of the latest jobless claims data, which rose to 263,000—the highest level in nearly four years—traders have adjusted their outlook, pricing in an 88% chance for a quarter-point cut and 11% for a half-point reduction next week. Markets continue to expect the Fed will cut rates by a total of 75 basis points by the end of this year.
Despite the modest increase in inflation reported for August, some analysts have stated that the jobless claims data could prompt the Fed towards more aggressive rate cuts. Seema Shah, chief global strategist at Principal Asset Management, remarked that while the CPI report indicated slightly higher-than-expected inflation, it is unlikely to deter the Fed from its planned rate cut.
Shah highlighted the momentum behind the economy, noting that jobless claims have indeed risen but remain significantly lower compared to figures from 2021, and the overall economic data does not suggest an imminent recession.
The August inflation report painted a complex picture. Some categories saw a decrease in “sticky” services inflation, with medical care services declining by 0.1% month over month after a notable increase in July. Conversely, travel expenses showed strong growth, with airfares rising by 5.9% in August following a 4% gain in July.
While softer medical costs have prevented a spike in “supercore” inflation—core services minus shelter—concerns remain regarding more cyclical or tariff-exposed categories. For instance, lodging prices fell by 1% in August after a sharper 2.9% drop in July. Prices for used cars and trucks increased by 0.5% in August following a 0.7% decline the previous month, and new vehicle prices exhibited similar trends.
Some economists, however, caution that inflation levels are still higher than favorable, indicating persistent challenges. Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve board economist, asserted that the CPI remains “too firm” for comfort and noted that any forthcoming rate cuts would not reflect good news on inflation, but rather poor employment data.
Further insights emerged from wholesale inflation data, which showed a 0.1% decline in producer prices in August—the first decrease in four months—suggesting that businesses may be absorbing some of the tariff-related costs. The lack of stronger price pressures, despite the ongoing import tariffs, could also indicate waning domestic demand amid a cooling labor market.
This report is part of ongoing coverage and may be updated as new information becomes available.
