Tariffs push US inflation higher, jobless claims spike highest since 2021; Fed faces stagflation test

While higher prices are concerning, Powell warned that “downside risks to employment are rising” and layoffs could accelerate quickly.

Inflation in the United States accelerated in August, unsettling policymakers just days before the Federal Reserve’s critical rate meeting. Consumer prices rose 2.9 percent from a year earlier, according to Labor Department data released Thursday. That’s up from 2.7 percent in July and marks the steepest annual increase since January.

Core inflation, which strips out food and energy, remained steady at 3.1 per cent. Both numbers sit uncomfortably above the Fed’s 2 percent target, underscoring the persistence of price pressures despite nearly two years of monetary tightening.

Price increases were widespread: groceries climbed 0.6 percent month-on-month, with coffee up 21 percent and beef steaks up 17 percent compared to last year. Gas prices jumped 1.9 percent from July, while airfare and hotel costs also spiked. Clothing, furniture and rents edged higher as well.

Job market weakens sharply

A separate Labor Department report added to the gloom. Weekly applications for unemployment aid surged by 27,000 to 263,000, the highest since 2021 and the sharpest jump in nearly four years.

The number is a proxy for layoffs and comes on top of downward revisions to earlier jobs data. Initial estimates for May and June were cut by a combined 258,000 positions, highlighting that hiring has been weaker than thought.

Daniel Hornung of the Stanford Institute for Economic Policy Research told the Wall Street Journal the troubling mix of rising inflation and a softening labour market 'is a pretty compelling weakening.'

Stagflation ghost resurfaces

The dual reports rekindled fears of stagflation, a toxic mix of rising prices and slowing growth not seen since the 1970s. Normally, inflation cools when growth slows, but tariff-driven cost increases are bucking that rule.

Sarah House, senior economist at Wells Fargo, told WSJ that tariffs aren’t being passed onto consumers all at once, but “if you look at the overall trend, you’re still seeing goods prices go up.”

Economists say the unusual mix of higher costs and weaker hiring leaves the Fed trapped between two conflicting goals: lowering inflation and supporting jobs.

Trump tariffs front and center

Much of the current price pressure stems from President Donald Trump’s sweeping tariff regime. Businesses are gradually passing those costs on to consumers. Some companies, like Walmart, have warned of steeper hikes as inventories turn over, while small businesses are struggling to absorb costs.

Raleigh restaurateur Cheetie Kumar told Associated Press her food costs are up nearly 10 percent from last year, with spices and chocolate rising by triple digits. She has raised menu prices but says “I’m at the limit of how much I can do so before demand wanes.”

Even large companies are not immune. E.L.F. Cosmetics raised prices by $1 earlier this year, but its CFO Mandy Fields admitted the move may not be enough to offset tariffs, AP reported.

Fed caught in a policy trap

The Federal Reserve now faces its toughest balancing act in years. Rate cuts are expected; futures tracked by CME FedWatch put the odds at 85 percent for a September cut, followed by more later this year. Markets are already cheering: stocks hit fresh records this week.

But Chair Jerome Powell has admitted that risks are rising. At Jackson Hole, he said recent conditions “may warrant adjusting our policy stance.” While higher prices are concerning, Powell warned that 'downside risks to employment are rising' and layoffs could accelerate quickly.

Typically, the Fed raises rates to cool inflation and cuts rates to support jobs. The current mix, higher inflation alongside weaker hiring, pulls policymakers in opposite directions.

Investors bet on cuts, economists urge caution

Wall Street is betting the Fed will slash its short-term rate from 4.3 percent to 4.1 percent next week and cut again later this year. But many economists caution that easing into tariff-driven inflation could backfire.

Joe Brusuelas, chief economist at RSM, told AP the Fed is in 'a very unusual spot,' preparing to cut into 'a sustained increase in prices' fueled by tariffs and resilient consumer spending among wealthier households.

Subadra Rajappa, head of US rates strategy at Societe Generale, struck a more hopeful note, saying that service costs are moderating and may help offset the tariff effect.