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.
August’s Consumer Price Index (CPI) showed an uptick in inflation from the previous month. (Getty Images) · Hispanolistic via Getty Images
“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.
“Jobless claims have jumped but are still quite low compared to 2021 levels, while the broader economic activity data and earnings reports do not signal an economy that is approaching a recessionary tipping point,” Shah said.
Against that backdrop, the August inflation report offered a mixed picture. Sticky services inflation eased in some categories, with medical care services down 0.1% month over month after a sharp rise in July and communication services also declining. But travel costs stayed hot, with airfares climbing 5.9% in August after a 4% gain the month prior.
Capital Economics noted that while softer medical costs kept “supercore” inflation — core services excluding shelter — in check, the Fed may be more concerned about firmer gains in cyclical or tariff-exposed categories.
On a monthly basis, lodging away from home fell 1% in August after a sharper 2.9% drop in July. Used car and truck prices rose 0.5% after a 0.7% decline the prior month. New vehicle prices saw a similar reversal from earlier easing. Some economists warn that inflation remains too sticky for comfort.
“The CPI is still too firm,” Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve Board economist, told Yahoo Finance. “This is not consistent with making progress toward 2%. When they cut next week, they will not be cutting because we have good news on inflation. They’ll be cutting because we have bad news on employment.”
Separately, wholesale inflation data out on Wednesday showed producer prices fell 0.1% in August, the first decline in four months, as a drop in services prices offset modest goods inflation. The data suggests businesses are absorbing some tariff costs, while the lack of stronger price pressures, even with import duties in place, may also point to softening domestic demand amid a weakening labor market.
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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