President Trump’s tariffs contributed to higher consumer prices in August, adding stress to the Federal Reserve’s already difficult situation as it deals with a hiring freeze that threatens to halt economic development.
According to a report issued Thursday by the Labor Department, the consumer price index increased at an annual pace of 2.9%, marking the fourth consecutive month of acceleration. In contrast, a less volatile gauge that does not include food and energy prices stayed above 3%.
Separately, the Department of Labor announced that last week’s number of new claims for unemployment benefits reached its highest point in nearly four years. Payroll growth in the spring and early summer was far less than many had thought, according to recent negative adjustments to previously disclosed employment statistics.
As Jerome Powell enters the latter months of his tenure as Fed chair, he has a number of challenges, the most significant of which are the simultaneous rise in inflation and a weakening job market. Investors are still betting that the Federal Reserve will reduce rates for short-term borrowing at its meeting next week. However, if the Fed cuts rates too quickly, inflation might pick up speed again. Rates that are excessively high will also make it more difficult for businesses to hire more people.
According to LPL Financial chief economist Jeffrey Roach, “it’s possible the Fed will hold in October if inflation expectations no longer look well-contained,” meaning that Powell could announce a quarter-point cut next week in response to the worrying labor market data.
Prices for new and used autos surged, adding to the overall cost of U.S. products. This rise was widely anticipated since Trump imposed higher levies on imports. While price increase in the service sector was the main driver of inflation in August, it was nonetheless a noticeable event.
Powell and other central bankers have been hesitant to reduce short-term borrowing costs for fear of further stoking inflation until lately. Companies in the United States that purchase goods from abroad have seen their expenses increase by hundreds of billions of dollars due to Trump’s tariffs.
Depending on pre-tariff inventory or just absorbing the tariffs, most corporations have done one of these things. However, analysts generally anticipate that these expenses will be passed on to consumers in the form of increased prices, which might lead to more inflation in the next year.
“We witnessed a widening breadth of inflation pressures in August and saw upticks in some trade-exposed sectors for the first time [new motor vehicles] – setting a concerning precedent for the inflation trajectory in the months ahead,” said Carrie Freestone, a U.S. economist at RBC Capital Markets.