U.S. inflation picked up in August, making things tricky for the Federal Reserve as it considers cutting interest rates. On one hand, slower job growth is raising concerns relating to the labor market. On the other, rising prices make the Fed cautious about moving too quickly. The latest Consumer Price Index showed inflation up 2.9% from last year, the fastest pace since early 2025. Core inflation, which excludes food and energy, held at 3.1%. Month to month, overall prices rose 0.4%, while core prices rose 0.3%, both slightly above expectations. The Fed has kept interest rates steady at 4.25%–4.5% this year after a series of cuts in late 2024. A big reason for the pause is concern over tariffs, which have driven up the costs of goods. Economist Nancy Lazar explained, “Tariffs are a tax… only companies with strong pricing power are holding up.” Several areas are fueling higher prices. Gasoline rose 1.9% in August, airfares spiked nearly 6%. New cars rose 0.3% and used cars climbed 1%, about 6% higher than last year. Housing costs went up 0.4%, and food prices increased 0.5%, with coffee alone surging 21% from a year earlier.
There was some relief, as utility gas and certain medical goods fell in price. The labor market adds another layer of complexity. Hiring has slowed, partly due to immigration restrictions, while layoffs remain low and unemployment is holding at 4.3%. That puts the Fed in a tough spot, they can cut rates to support jobs, or they keep rates high to control inflation. In the end, the Fed is will probably take things slowly. Rate cuts could help workers, but inflation isn’t going down fast enough. For now the central bank will probably move carefully, aiming to support the economy without letting prices spiral again.
