Inflation picked up in August while job growth slowed, leaving the Federal Reserve under pressure to cut rates even as consumer prices rise.
At a Glance
- Consumer prices rose 0.4 percent in August, up 2.9 percent from a year earlier
- Food and shelter costs were the largest drivers of inflation last month
- U.S. economy added just 22,000 jobs in August, with unemployment at 4.3 percent
- Fed expected to cut interest rates next week despite rising inflation
- CBO projects Trump immigration policy will shrink U.S. workforce
Inflation Surges Before Fed Meeting
The U.S. consumer price index rose by 0.4 percent in August, double the pace of July, according to Labor Department data released Thursday. Over the past year, prices have climbed 2.9 percent, keeping pressure on households as food and housing costs accelerated. Grocery prices jumped 0.6 percent last month after dipping in July, with meat up 5.6 percent and beverages up 4.6 percent compared to a year earlier. Rent and shelter costs also advanced by 0.4 percent.
Watch now: US Core CPI Rises as Expected in August
The price increases meant real wages dipped 0.1 percent on the month, leaving workers with slightly less purchasing power. Average hourly earnings stood at $11.30 in August, up modestly from $11.22 last year but eroded by inflation. Analysts noted that tariffs on imports were adding to consumer costs, with core goods prices rising at the fastest pace since mid-2023.
Fed Balances Rate Cuts and Risks
The Federal Reserve’s policy committee meets next week, facing a difficult decision: cut interest rates to support a weakening labor market or hold steady to contain inflation. Markets expect the Fed to move forward with its first rate cut of the year, despite the hotter inflation data.
Seema Shah of Principal Asset Management argued that employment concerns outweigh inflation pressures for policymakers, while Fitch Ratings economist Brian Coulton pointed to tariffs as a key inflation driver. Fed Chair Jerome Powell has described the job slowdown as “curious,” noting that both supply and demand for workers have fallen together, compounding risks for the broader economy.
Job Growth Stalls, Risks Mount
August hiring slowed sharply, with just 22,000 jobs created nationwide. The three-month average dropped to 29,000, compared to well over 100,000 earlier in the year. The unemployment rate ticked up to 4.3 percent, the highest since 2021, as unemployed workers began outnumbering job openings.
Businesses have scaled back hiring and investment amid policy uncertainty, particularly around trade tariffs. Meanwhile, immigration restrictions have reduced labor supply, further constraining the job market. The Congressional Budget Office projected that the Trump administration’s One Big Beautiful Bill Act will lower the U.S. population by hundreds of thousands by 2035, reducing future labor force growth.
Economists at the American Enterprise Institute warned that sustainable job growth could fall to as low as 10,000 per month in the second half of 2025, compared with up to 180,000 in 2024. Such a slowdown would limit the economy’s long-term capacity, complicating the Fed’s decisions on interest rates.
Outlook for 2025
The combination of slower job creation, higher prices, and restrictive immigration policies has raised the risk of stagflation, an environment where inflation persists despite weak economic growth. The Fed must weigh the immediate need to bolster employment against the longer-term threat of entrenched inflation.
With tariffs and labor shortages feeding into price pressures, and consumer spending already strained by falling real wages, the central bank faces a narrowing path to keep growth on track without sparking further instability.
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