Washington (AFP) – US consumer inflation rose last month to its highest level since January, government data showed Thursday. Although analysts believe that this will not deter the central bank from an interest rate cut next week, the data also underscored cost-of-living pressures on households as President Donald Trump’s tariffs filter through the world’s biggest economy, complicating the Federal Reserve’s role in maintaining stable prices.
The consumer price index (CPI) picked up to 2.9 percent in August, accelerating from 2.7 percent on a year-on-year basis in July, said the Labor Department. The figure was in line with analysts’ expectations, as economists try to gauge if Trump’s duties will trigger a one-off price increase or lead to persistently higher costs. On a month-on-month basis, CPI rose 0.4 percent in August, also picking up from 0.2 percent in July. A measure of underlying inflation, stripping away the volatile food and energy components, was up by 3.1 percent from a year ago.
“We are seeing some impact from tariffs, especially with higher prices on cars and clothes,” said LPL Financial chief economist Jeffrey Roach. He added that grocery costs also clocked their biggest jump since 2022, adding to consumers’ stress. Since returning to the presidency in January, Trump has imposed a 10-percent tariff on almost all trading partners and higher rates hitting dozens of economies. He has separately targeted sector-specific imports such as steel and autos, and economists warn that the cumulative effect will take time to reach consumers.
All eyes are on inflation numbers given their potential bearing on the Fed’s interest rate decisions. However, the central bank is poised to start cutting rates at its next policy meeting from September 16-17 even with slightly hotter inflation, Nationwide chief economist Kathy Bostjancic told AFP. “The jump in initial jobless claims to its highest reading since October 2021 overshadows the importance of the inflation report,” she said, referring to a separate set of data released Thursday. The uptick signals that the labor market is losing steam “and reinforces that the Fed needs to start cutting rates next week.”
International Monetary Fund spokesperson Julie Kozack told reporters Thursday that “some strains are beginning to show” in the US economy, with demand cooling and job growth slowing. “There is scope for the Fed to begin to lower policy rates,” she added at a press briefing, noting risks to the employment market. A rate reduction, which would be the first since December, will likely also be the start of a series of cuts, Bostjancic said. Traders widely anticipate that the Fed will lower the benchmark lending rate by 25 basis points at the end of its September meeting.
While Trump has repeatedly pushed for lower interest rates, policymakers have kept levels unchanged this year as they monitored the effects of tariffs on prices. With employment weakening, however, the Fed might be inclined to make a cut to boost the economy, as opposed to keeping rates at a higher level when seeking to contain inflation.
The August CPI boost, however, came as food, energy, and shelter costs all increased. “The middle-class squeeze from tariffs is here,” warned Navy Federal Credit Union chief economist Heather Long. “It’s troubling that so many basic necessities now cost more,” she added in a note, cautioning that “this is only the beginning.”
While businesses stockpiled inventory in anticipation of Trump’s tariffs, allowing them to stave off some immediate price hikes, they will eventually have to replenish stock at higher import costs. “Coffee is up 21 percent from last August, audio equipment is up 12 percent, and living and dining room furniture is up 10 percent. These items are directly impacted by tariffs,” Long said.
Roach, the LPL economist, added that August’s inflation data may not change the Fed’s immediate plans for a rate reduction. But “it’s possible the Fed will hold in October if inflation expectations no longer look well-contained,” he said.
© 2024 AFP
