US consumer prices rose in August, reinforcing expectations that the Federal Reserve will lower interest rates next week even as inflation remains above target.
Data from the Bureau of Labor Statistics showed the consumer price index (CPI) rose 2.9% from a year earlier, up from 2.7% in July and in line with economists’ forecasts.
On a monthly basis, prices climbed 0.4%, exceeding the 0.3% gain anticipated by economists. Core inflation, which excludes food and energy, held steady at 3.1%.
The increase was driven by higher food and gasoline prices, while shelter costs also contributed significantly with a 0.4% monthly gain. Used car and truck prices jumped 0.9% after four months of declines, partly reflecting tariff impacts, while new vehicle prices edged lower.
Analysts said the data underscores the complexity of the inflation picture but does little to change expectations for Fed easing.
Wells Fargo economists noted that “the heat continues to gradually get turned up on inflation,” with a 0.35% increase in core services and “the largest monthly gain in goods inflation since January.”
Still, they pointed to considerable downside risks in the labor market, which they believe “creates more urgency to act to keep the jobs market from falling apart.”
Wells Fargo expects a 25 basis-point cut next week and 75 basis points of easing in total by year-end.
Kathleen Brooks, research director at XTB, said the market reaction shows that rate cuts remain firmly in play.
“In the aftermath of this report, the dollar has done a 180-degree turn and is lower across the board. S&P 500 futures have whipsawed slightly, but are now higher on the day, and US bond yields are declining,” Brooks said.
“This price action suggests two things: 1, there is a high bar for the Fed not cutting interest rates in the coming months, 2, the labour market continues to trump the inflation print and could do for some time.”
The latest labor data added weight to that view. Weekly jobless claims rose to 265,000, one of the highest levels in four years, underscoring the strains in the jobs market.
Brooks noted that “lack of feed through from tariffs into the CPI report could ease Fed concerns about the future path of inflation,” especially given mounting signs of labor market weakness.
Nathaniel Casey, investment strategist at Evelyn Partners, pointed to tariff effects becoming more visible in some categories, such as apparel, which recorded its fastest monthly increase since February.
However, he noted that, “while the full impact of tariffs remains uncertain and inflation appears to be edging higher, the Federal Reserve is likely to view this as less concerning than the recent signs of softness in the labour market.”
He expects the Fed to restart its easing cycle at the September meeting.
Market pricing now reflects a small but rising probability of a larger half-point cut, with CME FedWatch data showing the odds increasing from 8% before the CPI release to about 11% afterward.
Despite the inflation pickup, analysts broadly agree that labor market weakness will outweigh price pressures in the Fed’s decision-making.
Brooks noted that “there is a high bar for the Fed not cutting interest rates” in the coming months.