Inflation in the United States modestly edged up in August, as businesses continued to pass tariff costs on to consumers. The latest update to the Consumer Price Index (CPI), which measures the cost of a typical basket of goods and services, showed a 2.90% year-on-year increase, its highest level since January. Core CPI, which excludes volatile items like food and energy, held steady at 3.10% after rising in July. According to data from the US Bureau of Labour Statistics and as reported by Trading Economics, price pressures intensified across several categories. Food inflation accelerated to 3.20% from 2.90% the previous month. Prices for used cars and trucks jumped 6%, up from 4.80%, while new vehicles saw a more modest increase of 0.70% from 0.40%. Energy costs, which had been falling for seven consecutive months, reversed course and rose by 0.20%.

Though the prices of petrol and fuel oil continued to decline, the pace of decline slowed, with petrol down 6.60% and fuel oil falling just 0.50%. Natural gas prices remained elevated, showing no change from the previous month’s sharp 13.80% rise. Despite the uptick in inflation, investors on Wall Street remain optimistic that the Federal Reserve (Fed) will lower interest rates at its policy meeting today. Markets have largely priced in a quarter-point rate cut, amid growing concerns about the health of the labour market. Although the Fed has held off on cutting rates for the past year, citing uncertainty around immigration and trade policy, it now appears poised to shift its stance.

With interest rates between 4.25% and 5.50%, the central bank’s focus on reaching its 2% inflation target seems to be giving way to growing concern over labour market data. Federal Reserve Chair Jerome Powell recently noted that evolving economic conditions “may warrant adjusting our policy stance,” a comment widely interpreted as a signal that a rate cut could be imminent. Powell acknowledged that tariffs are increasingly driving up prices, but emphasised that a cooling labour market has become a key concern for the Fed. He stated that “downside risks to employment are rising,” reinforcing the view that economic growth may be faltering.

Further evidence of this came earlier in the month when employment figures for May and June were revised down by a combined 258 000 jobs. The US unemployment rate edged up to 4.30% in August from 4.20% in July, with the number of unemployed individuals increasing by 148 000 to 7.38 million. These revisions have heightened concerns that the jobs market may not be as strong as previously thought, giving the Fed added justification for loosening monetary policy. In short, while inflation remains above the Fed’s target, the more pressing concern now appears to be a softening jobs market and broader signs of economic weakness. With tariffs continuing to inflate consumer prices and employment figures underperforming, the Fed is facing growing pressure to act. All eyes are now on the central bank’s decision, which could mark a crucial turning point in its monetary policy approach.

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Bottom Line

The Fed is attempting to strike a delicate balance: keeping interest rates low enough to avoid placing undue pressure on the economy or job market, while still keeping inflation under control. With little room for error, we expect any rate cuts to be gradual and modest, particularly in the absence of clear evidence that the economy is under significant strain.

Macroeconomics in brief