The cost of living continues to increase for Americans at a time when the job market appears to be on shakier footing, creating a complicated economic problem that could be tricky to solve.
Consumer prices rose 0.4% in August, driving the annual inflation rate to 2.9%, the highest since January, according to Bureau of Labor Statistics data released Thursday. The reading marked an acceleration from the 2.7% increase seen in July, with price hikes driving up the cost of Americans’ most basic needs.
Grocery and fuel prices shot higher in August after falling the month before. Food at home prices rose 0.6% — the highest monthly jump in nearly three years — and gas prices climbed by 1.9% after falling 2.2% the month before.
The latest Consumer Price Index provided further evidence that some costs from President Donald Trump’s policies, such as sweeping immigration reform and steep tariffs, are slowly being passed along to consumers, economist Dean Baker, co-founder of the Center for Economic and Policy Research, told CNN on Thursday.
“Fresh fruits and vegetables up 2% in one month, it is striking,” Baker said. “This is mass deportations and tariffs.”
“A lot of the crops are rotting in the fields because (producers) don’t have the crew to pick them. That certainly can be associated with mass deportations; they don’t have the workers they need.”
While there are general factors in addition to policies that influence food costs (including demand, climate, weather and global matters), prices are going up at a time when the US job market has shifted into a lower gear.
Paychecks also aren’t going as far as they used to: Real (inflation-adjusted) hourly earnings slowed to 0.7% in August, the lowest gain in more than a year, BLS data shows.
“The consumer aspects of this are actually more problematic politically than the tariff aspects are right now for the administration,” Tyler Schipper, associate professor in economics and data analysis at the University of St. Thomas in St. Paul, Minnesota. “Even if real earnings are up, consumers don’t perceive it that way, and this report indicates that things at the grocery store are still getting more expensive.”
“And that’s just going to harden those beliefs that their economic worlds aren’t getting better,” he added.
Stocks moved higher Thursday morning, with the Dow rising 528 points, or 1.16%, to trade above 46,000 points for the first time. The broader S&P 500 gained 0.7% and the tech-heavy Nasdaq Composite rose 0.6%. Traders continue to price in an 89% chance the Federal Reserve cuts its benchmark interest rate by a quarter point at its policy meeting next week, with an 11% chance of a jumbo half-point cut.
“The latest inflation data does support the notion that inflation is reaccelerating, but at a gradual pace,” Preston Caldwell, chief US economist at Morningstar, wrote Thursday in a note. “It won’t stop the Fed from cutting next week.”
Economic warning signs and a looming rate cut
The latest labor market data, including sluggish job creation in August and job losses this summer, shows that the foundation for the US economy is starting to show more cracks.
Still, the unemployment rate has remained within a historically healthy range, an indication that the weakness in the job market is more of a sign of slowing labor supply (retirements and immigration) running alongside slower demand. Layoffs, a concerning indicator of a potential downturn, haven’t yet accelerated.
However, the unemployment rate moved slightly higher in August, and new data on Thursday showed one of the biggest weekly increases in jobless claims seen in more than a year: First-time filings for unemployment insurance — considered a proxy for layoffs — jumped by 27,000 to 263,000 for the week ending September 6. That’s the highest level seen since late-October 2021, Department of Labor data showed Thursday.
A rate cut from the Fed, even by a small amount, could be enough to shore up some confidence in businesses and keep a floor under the labor market and elsewhere, economists told CNN last week.
But the extent to which a quarter-point cut brings relief to Americans watching prices go up remains to be seen.
“It’s pretty clear that the labor market has shifted into a lower gear,” Schipper said. “But what consumers are hearing is, ‘my job is at risk, and grocery store prices are still accelerating.’ And I don’t know that a headline Wednesday next week that the Fed cuts interest rates by (a quarter-point) is really going to be the salve that makes the problem go away.”
The Fed, which has a dual mandate of full employment and price stability, has a tough choice to make if inflation continues to rise, CEPR’s Baker said. Central bankers, notably Fed Chair Jerome Powell, also have been under increasing pressure from Trump to slash rates.
“For all of Trump’s (comments), I don’t know if a half-point would be better in the sense that I think it would send a panic signal into the market,” Baker said. “And for people’s living standards, (inflation) is bad news. Electricity prices are up 0.2 of a percent, 6.2% year over year. When you see Trump clamping down on wind and solar and we know AI is eating up electricity left and right, we aren’t pursuing anti-inflation policies at all – kind of the opposite – and that can’t be good news.”
The housing-related shelter category, which is the heaviest-weighted in the CPI, was the leading contributor of August’s monthly increase; however, on an annual basis, shelter inflation continued to slow from pandemic-era highs to 3.6%, its lowest rate in nearly four years.
Excluding food and energy, which tend to be volatile categories, the closely watched core CPI index rose 0.3% on a monthly basis (a slight acceleration in pace) but held steady at 3.1% for the 12 months ended in August.
Trump’s sweeping trade policy of tacking steep tariffs on most goods that cross America’s borders are widely expected to result in higher prices for businesses and consumers – although at a gradual pace and not to the extent seen in 2022 and other high-inflationary periods.
There are myriad factors as to why prices haven’t risen quickly and sharply: Businesses loaded up their warehouses with pre-tariffed goods; higher costs have been eaten in part by entities along the supply chain, lessening the blow at the retail store; Trump’s fits-and-starts approach to tariffs has meant that the bulk of them did not go into effect for months; and businesses have held off on decisions (such as hiking prices) because of policy-related uncertainty.
“It appears possible that some firms were either hoping that the August trade deals might result in lower tariff rates, or the courts might strike down some of the tariffs,” Michael Hanson, JPMorgan economist, wrote in a note Thursday to investors. “The former did not happen, and we continue to expect the administration to find ways around the latter if it were to happen to maintain the current elevated level of the effective tariff rate. As such, we continue to anticipate additional firming of consumer inflation readings in coming months.”
Economists were expecting the pace of price hikes to heat up in August as a wider swath of businesses passed along higher costs from President Donald Trump’s expansive tariffs.
FactSet estimates were for a 0.3% monthly gain and a 2.9% annual increase.
Economists have been watching the “core goods” category like hawks for signs of tariff-related cost pass-throughs to consumers. In August, as in months before, there are clear indications that prices — particularly for items that are not widely produced domestically — are on the rise.
The core goods category (which excludes food and energy) rose 0.3% in August, its highest pace in seven months, driven higher by a long-anticipated increase in new car prices. Overall goods prices are showing a slow and steady incline after having fallen for much of the past two years in an unwind from the pandemic nesting boom.
Prices of pharmaceuticals, which are exempted from tariffs for now, fell 0.3% on a monthly basis; however, durable goods excluding vehicles rose 0.5% in August and are running at an 8.5% annualized pace in the past three months, Morningstar’s Caldwell noted.
“This is much higher than normal (deflation of 1%-2% is normal for this category),” he wrote. “This is clearly showing the impact of tariffs.”
Some of the categories seeing the biggest monthly price leaps in August are those heavily imported and highly exposed to tariffs: Sewing machines, fabric and supplies (+9.1%); jewelry (+6.8%); women’s outerwear (+4.4%); instant coffee (+4.9%); tomatoes (+4.5); beverage materials including coffee and tea (+2.8%); bananas (+2.1%).
On the services side, those were lifted by a spike in airfare prices, which have moved higher after demand fell off due to economic and air safety uncertainty. Excluding airfares and shelter, core services inflation was roughly flat.
