US inflation rises 2.9% in August, Fed faces tightrope ahead of rate decision

US inflation climbed more than anticipated in August while jobless claims rose, presenting the Federal Reserve with mixed signals ahead of next week’s policy meeting.

The much-anticipated US consumer price index (CPI) rose 2.9% in August from a year earlier, the Bureau of Labor Statistics said on Thursday, matching economists’ expectations.

The figure also exceeded the monthly estimate of 0.3%, with prices advancing 0.4% compared with July’s 0.2% gain.

Economists surveyed by Bloomberg had expected headline CPI to climb at the same 2.9% pace, up from July’s 2.7% annual increase.

The release comes at a crucial time, as the Federal Reserve prepares to decide its next interest rate move next week.

A separate report showed the number of Americans filing new applications for unemployment benefits stood at 263,000 for the week ended September 6, above estimates of 235,000.

Shelter and food costs lead monthly increase

Shelter was the largest contributor to August’s monthly gain, with a 0.4% rise.

Food prices also edged higher, increasing 0.5% during the month.

Within that category, the food-at-home index rose 0.6% while food away from home rose 0.3%. Energy prices climbed 0.7%, led by a 1.9% rise in gasoline.

Core inflation, which excludes food and energy, held steady at 3.1% year on year, the same as July. Fed officials consider core to be a better gauge of long-run trends.

On a monthly basis, core prices rose 0.3%, matching July’s increase, which marked the strongest monthly gain in six months.

Higher costs for airline fares, used cars and trucks, apparel, and new vehicles offset declines in medical care, recreation, and communication.

Rate cut expectations dominate market view

The CPI report has sharpened the debate over monetary policy.

Markets are pricing in a 90% chance that the Fed will cut its benchmark rate by 25 basis points next week, according to the CME FedWatch tool.

That would lower the policy range to 4% to 4.25%, easing borrowing costs across consumer and business loans.

Some investors see a growing possibility of a larger half-point cut, particularly after preliminary revisions revealed the US economy added 911,000 fewer jobs in the 12 months through March 2025 than earlier reported.

Bankrate financial analyst Stephen Kates called Thursday’s CPI release “one of the most consequential of the year,” warning that renewed price acceleration in essentials such as groceries and electricity could be troubling at a time when labor market momentum is fading.

Fed faces delicate balancing act

Although inflation has eased significantly from its 9.1% peak in June 2022, prices have still risen roughly 9% since July 2022, weighing on household budgets.

At the same time, job gains have cooled, complicating the Fed’s dual mandate of achieving both price stability and full employment.

New York Fed President John Williams has acknowledged the challenge of steering policy amid rising unemployment and slowing growth.

Markets expect at least one or two more rate cuts by 2026, but the timing and scale remain uncertain.

Producer prices show signs of cooling.

Separately, producer price data released on Wednesday showed wholesale inflation fell 0.1% in August, the first decline in four months.

The drop was driven by weaker trade services, which offset modest gains in goods prices.

The figures suggest businesses may be absorbing tariff-related costs, with weaker domestic demand further tempering inflationary pressures.