Inflation edged higher in August, government data showed Thursday, as investors looked for signs of how much President Trump’s tariffs are filtering into consumer prices and what that means for how aggressively the Federal Reserve will cut interest rates.
The latest data from the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) increased 2.9% annually in August, a rise from July’s 2.7% increase and on par with economist expectations.
Month over month, prices rose 0.4%, an uptick from July’s 0.2% increase and higher than economists’ expectations of a 0.3% monthly gain. The rise was driven by stickier gasoline prices and firmer food inflation.
Core inflation, which strips out volatile food and energy, rose 3.1% year over year in August, unchanged from July and in line with estimates. On a monthly basis, core prices climbed 0.3%, matching July’s increase, which was the strongest monthly rise in six months.
Tuesday’s report arrives as the Fed debates its next interest rate move. Despite stickier prices in August, markets still expect the Fed to deliver a quarter-point cut at next week’s policy meeting, according to the CME FedWatch tool.
Odds of a larger half-point reduction have risen in recent days, especially after preliminary benchmark revisions showed the US economy added 911,000 fewer jobs in the 12 months through March 2025 than initially reported.
Fresh data on Thursday added to the picture of a cooling labor market, with weekly jobless claims rising to 263,000 — the highest in nearly four years, up from a revised 236,000 the prior week and well above economist expectations for 235,000.
Following the release, traders priced in a roughly 88% chance of a quarter-point cut and 11% probability of a half-point move next week, showing slightly more conviction for a larger reduction than the day before. By year-end, markets still expect the Fed to cut rates by a total of 75 basis points.
“Today’s CPI report has been trumped by the jobless claims report,” Seema Shah, chief global strategist at Principal Asset Management, wrote in reaction to the data. “While the CPI report is a tad hotter than expected, it will not give the Fed a moment of hesitation when they announce a rate cut next week.”
Shah said the rise in jobless claims could add urgency to the Fed’s decision, with Powell likely to indicate that a series of rate cuts is coming. Still, she noted, while some at the Fed, including potential chair contenders, may float the idea of a 50 basis point cut, a move of that size isn’t necessary.
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