U.S. inflation accelerated in August at a speed that is likely to keep the Federal Reserve cautious about lowering borrowing costs too quickly once it restarts cuts as soon as next week.
The Consumer Price Index, released on Thursday by the Bureau of Labor Statistics, rose 2.9 percent from the same time last year, the fastest annual pace since the start of 2025.
“Core” inflation, which the central bank tracks as a gauge of underlying inflation since it strips out volatile items like energy and food prices, steadied at 3.1 percent.
The overall measure of inflation rose 0.4 percent for the month, slightly higher than economists had expected. The core measure rose 0.3 percent.
The inflation data has been pivotal to the Fed’s debate about not only when it should lower interest rates again after a long pause but also the speed at which the central bank moves as that process kicks off.
Officials have opted to proceed cautiously so far this year given concerns about the effect that President Trump’s tariffs will have on consumer prices. They have kept interest rates steady all year at a range of 4.25 percent to 4.5 percent, after a series of reductions in the final months of 2024. That approach has angered Mr. Trump, who wants borrowing costs substantially lower.
The issue for the Fed is that Mr. Trump’s levies have pushed up costs across a wide range of goods, upending earlier progress on bringing inflation down. Declines in other categories have limited the overall increase, helping to placate earlier fears that the resulting inflation surge would be much more intense.
One of those offsets had been energy prices, but those costs accelerated sharply in August. Gasoline prices jumped 1.9 percent over the month, contributing to a 0.7 percent increase in the overall energy index. Airfares spiked 5.9 percent in August, after a 4 percent increase the previous month.
The impact of Mr. Trump’s tariffs on the automobile sector also showed through more notably in August, with prices for new and used vehicles rising after several months of more muted gains. The index tracking new vehicles increased 0.3 percent in August and is up 0.7 percent from the same time last year. Prices for used vehicles rose 1 percent and are up 6 percent from a year earlier.
Household furnishings also became more expensive in August, as did clothing. Shelter prices rose 0.4 percent, the largest contributor to the overall monthly increase. Food prices rose 0.5 percent over that same period, and 3.2 percent compared with last year. Coffee prices in particular have jumped significantly: They are up nearly 21 percent from August 2024, and in August alone rose 3.6 percent.
“Tariffs are a tax. It’s a regressive tax that is causing a bifurcated retail community where only companies that have decent pricing and high quality are doing well,” said Nancy Lazar, chief global economist at the investment bank Piper Sandler. “Weak consumer spending is going to put downward pressure on certain prices.”
Policymakers are keeping close tabs on prices across the services sector, which accelerated in July. Price pressures need to stay contained for officials to feel more confident that tariffs will result in only a temporary burst in inflation rather than something more pernicious. Once energy-related items are filtered out, services inflation rose just 0.3 percent in August and are up 3.6 percent year over year.
But the prospect of resurgent inflation is not the only risk the Fed must consider. Monthly job growth slowed sharply this summer, partly because companies decided to hold back from hiring. A steep drop in the supply of available workers stemming from Mr. Trump’s immigration restrictions has had a meaningful impact, too. Layoffs remain low, however, and the unemployment rate has stayed relatively stable, at 4.3 percent as of August.
That has resulted in what Jerome H. Powell, the Fed chair, described late last month as a “curious kind of balance” for the labor market, which made it more susceptible to a downturn.
“This unusual situation suggests that downside risks to employment are rising,” he said during a speech in August. Mr. Powell used that speech to send his strongest signal yet that the central bank would soon begin lowering borrowing costs. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
On Thursday, the Labor Department reported that 263,000 people filed for jobless benefits for the first time last week, surpassing expectations and marking the highest number since October 2021.
The Fed will convene next week for its two-day meeting, with its decision on interest rates to be announced on Wednesday. It is broadly expected to lower interest rates by a quarter of a percentage point to a range of 4 percent to 4.25 percent. After September’s meeting, officials will gather twice more this year to vote on interest rates.
Jonathan Hill, head of U.S. inflation strategy at Barclays, said he expected the central bank to reduce interest rates in quarter-point increments at consecutive meetings until borrowing costs reached a more “neutral” setting that neither revs up growth nor reduces it. He estimates that to be around 3 percent.
“We just had a big consumption tax from tariffs with a weakening labor market, and we are expecting slowing shelter inflation,” he said. “All of that would point toward slowing inflation as we get into 2026, and that’s perfectly consistent with the Fed cutting to neutral.”
Decisions on interest rates are made by all seven members of the Fed’s Board of Governors as well as a rotating group of presidents from the 12 regional reserve banks.
Lisa Cook, the Fed governor whom Mr. Trump is trying to oust over allegations she committed mortgage fraud, is poised to be in attendance after a federal judge ruled this week that she could continue serving in her role as she contests the legality of her dismissal. The Trump administration appealed the decision on Wednesday, but it is not clear when the U.S. Court of Appeals for the District of Columbia Circuit will hear the case.
In another twist, the Fed may have a new member by the time of its next vote, with Mr. Trump’s pick to replace Adriana Kugler, who resigned last month, being fast-tracked through the Senate. Stephen Miran, who most recently served as Mr. Trump’s top economic adviser, could be voted in as early as Monday despite concerns about his willingness to uphold the central bank’s longstanding political independence. He is expected to support a much more substantial reduction in interest rates than a majority of sitting officials. Two other Trump-appointed Fed governors have also split from that group in support of earlier cuts.
Christopher J. Waller and Michelle W. Bowman dissented to the Fed’s decision in July to hold interest rates steady and have since urged their colleagues to support lower borrowing costs.
In Europe, there is more concern that the shifting U.S. trade policy will push inflation in the region too low. The bank forecasts that inflation will be below its 2 percent target in 2026 and 2027, in part because a stronger euro makes imports cheaper. But policymakers aren’t rushing to react. On Thursday, the central bank held its key interest rate at 2 percent.
“The outlook for inflation remains more uncertain than usual, as a result of the still volatile global trade policy environment,” Christine Lagarde, the president of the European Central Bank, said on Thursday.
Traders expect that the E.C.B. is done cutting rates, as the economy shows some resilience and an agreement with the U.S. on tariffs helps ease some uncertainty.
The latest data also comes at a tumultuous time for the agency responsible for releasing it.
The Department of Labor’s inspector general’s office said on Wednesday that it was “initiating a review of the challenges that the Bureau of Labor Statistics encounters collecting and reporting closely watched economic data.”
In June, the bureau said it was reducing its collection of data on consumer prices, and the agency had stopped gathering data entirely in several areas.
Mr. Trump fired the head of the statistics agency, Erika McEntarfer, weeks earlier after an unexpectedly weak monthly jobs report. He has since nominated E.J. Antoni, a conservative economist, to replace her. Mr. Antoni has not been confirmed by the Senate.
Ben Casselman and Eshe Nelson contributed reporting.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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