By CHRISTOPHER RUGABER, Associated Press
WASHINGTON — Inflation rose last month as the price of gas, groceries and airfares jumped, while a measure of layoffs also increased, putting the Federal Reserve in a tough spot as it prepares to cut rates at its meeting next week.
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Consumer prices increased 2.9% in August from a year earlier, the Labor Department said Tuesday, up from 2.7% the previous month and the biggest increase since January. Excluding the volatile food and energy categories, core prices rose 3.1%, the same as in July. Both figures are above the Federal Reserve’s 2% target.
The reading is the last the Fed will receive before their two-day meeting begins Tuesday, where policymakers are widely expected to cut their short-term rate to about 4.1% from 4.3%.
The new inflation data underscores the challenges the Fed is facing as it experiences relentless pressure from President Donald Trump to cut rates. Inflation remains stubborn while the job market is weakening, diverging trends that require polar reactions from Federal Reserve policymakers to address.
Hiring has slowed sharply in recent months and was lower than previously estimated last year. The unemployment rate ticked up in August to a still-low 4.3%. And weekly unemployment claims rose sharply last week, the government also reported Thursday, a sign layoffs may be picking up.
The number of people seeking unemployment benefits jumped 27,000 to 263,000, the most in nearly four years. Applications for jobless aid are considered a proxy for layoffs.
Economists said the rise in jobless claims shook financial markets and make it more likely the Fed will steadily reduce borrowing costs this year.
“Consumer inflation came in mildly hotter than forecast, but not nearly high enough to prevent the Fed from starting to cut rates next week,” Kathy Bostjancic, chief economist for Nationwide, said. “The labor market is losing steam and reinforces that the Fed needs to start cutting rates next week and that it will be the start of a series of rate reductions.”
Typically the Fed would cut its key rate when unemployment rose to spur more spending and growth. Yet it would do the opposite and raise rates — or at least keep them unchanged — in the face of rising inflation. Last month, Chair Jerome Powell signaled that Fed officials are increasingly concerned about jobs. Yet stubbornly high inflation could keep the Fed from cutting very quickly.
On a monthly basis, overall inflation accelerated, as prices rose 0.4% from July to August, faster than the 0.2% pace the previous month. Core prices rose 0.3% for the second straight month.
Gas prices jumped 1.9% just from July to August, the biggest monthly increase since a 4% rise in December. Grocery prices climbed 0.6%, pushed higher by more expensive tomatoes, apples, and beef. The cost of travel soared, with air fares rising 5.9% just from July to August and hotel room prices rising 2.3%. Rental costs also increased, rising 0.4%, faster than the previous month.
Trump’s sweeping tariffs pushed up the prices of many imported goods. Clothing costs rose 0.5% just last month, though they are still just slightly more expensive than a year ago. Furniture costs rose 0.3% and are 4.7% higher than a year earlier. Appliance costs also rose from July to August, after falling the previous month.
The inflation data arrives at the same time that Trump has sought to fire Fed governor Lisa Cook as part of an effort to assert more control over the Fed. Yet late Tuesday, a court said the firing was illegal and ruled that Cook could keep her job while the dispute played out in the courts.
Some restaurant owners have boosted prices to offset the rising costs of food. Cheetie Kumar, who owns Mediterranean eatery Ajja in Raleigh, North Carolina, said she’s facing higher costs on everything ranging from spices she imports from India, coffee and chocolate she gets from Brazil, and soy she gets from Canada.
“Those are things that I cannot source locally, we do source a lot of produce and meat and everything else from local farmers, but I don’t know any nutmeg growers in North Carolina,” she said.
Her overall costs are up about 10% from a year ago, with beef costs up 7%, and much bigger increases for things like coffee, chocolate (300%) and spices (100%).
She’s raised prices on some of her menu items by $1 or $2, but said she’s at the limit of how much she can do so before demand wanes and she stops earning a profit.
Bigger companies are also feeling the pinch.
E.L.F. Cosmetics said this spring that it was raising prices by $1. Last month, however, CFO Mandy Fields said it is no longer certain whether the $1 price increases will be enough to offset rising tariff costs.
Plenty of other retailers and brands haven’t spelled out specific price hikes but many, including Home Depot and Macy’s, have described them as modest or say they are taking a surgical approach.
Shoppers have yet to feel the big sting economists predicted had earlier in the year after many retailers ordered goods ahead of tariffs and who also have absorbed a big chunk of the costs rather then passing them along to consumers grown increasingly leery of price increases.
But Walmart and other big chains have warned of costs increases as they replenish their inventories, with the full impact of tariffs in effect.
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AP Business Writer Anne D’Innocenzio contributed from New York. AP Business Writer Mae Anderson contributed from Nashville.