Rising inflation and a deteriorating job market puts the Fed and
Americans in a difficult spot
[September 12, 2025] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — Inflation rose last month as the price of gas,
groceries and airfares jumped while new data showed applications for
unemployment aid soared, putting the Federal Reserve in an increasingly
tough spot as it prepares to cut rates at its meeting next week despite
persistent price pressures.
Consumer prices increased 2.9% in August from a year earlier, the Labor
Department said Thursday, up from 2.7% the previous month and the
biggest jump since January. Excluding the volatile food and energy
categories, core prices rose 3.1%, the same as in July. Both figures are
above the Federal Reserve’s 2% target.
A separate government report Thursday showed that weekly applications
for unemployment aid jumped 27,000 to 263,000, the highest in nearly
four years. Requests for jobless benefits are a proxy for layoffs.
Recent reports have also showed that hiring has weakened dramatically
this year and was lower than previously estimated last year.
The data raises the specter of “stagflation,” a trend that last
bedeviled the U.S. economy in the 1970s. The term refers to a period of
slower growth, higher unemployment along with rising inflation. It is
unusual because a weak economy typically keeps inflation in check.
Such a scenario could create major headaches for the Fed as it prepares
for a meeting next week, when policymakers are widely expected to cut
their short-term rate to about 4.1% from 4.3%. The Fed is under
relentless pressure from President Donald Trump to cut rates. At the
same time, stubborn inflation while the job market is weakening is
difficult for the central bank because they are diverging trends that
require polar reactions from Fed policymakers to address.
Typically the Fed would cut its key rate when unemployment rises to spur
more spending and growth. Yet it would do the opposite and raise rates —
or at least keep them unchanged — in the face of rising inflation.
Last month, Chair Jerome Powell signaled that Fed officials are
increasingly concerned about weaker hiring, setting the stage for a rate
cut next week. Wall Street investors think there is an 85% chance the
Fed will cut twice more after that, according to futures pricing tracked
by CME Fedwatch.
“Consumer inflation came in mildly hotter than forecast, but not nearly
high enough to prevent the Fed from starting to cut rates next week,”
Kathy Bostjancic, chief economist for Nationwide, said. “The labor
market is losing steam and reinforces that the Fed needs to start
cutting rates next week and that it will be the start of a series of
rate reductions."
Where inflation heads next is a key question for the Fed. While
Thursday's report showed inflation picked up, data released Wednesday
suggested prices at the wholesale level are cooling. Economists also
noted that a separate measure of inflation that the Fed prefers, which
will be released in about two weeks, should come in lower than
Thursday's figures and paint a more benign picture of prices.
On a monthly basis, overall inflation accelerated, rising 0.4% from July
to August, faster than the 0.2% pace the previous month. Core prices
rose 0.3% for the second straight month.
Many economists and some key members of the Fed think that the current
pickup in inflation reflects one-time increases from Trump's sweeping
tariffs and won't lead to a lasting inflationary trend. They argue that
a weaker job market will hold down wages and force companies to keep
prices in check.
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A personal shopper gathers items to fill an online grocery order in
Dallas, Thursday, Aug. 28, 2025. (AP Photo/LM Otero)
 Subadra Rajappa, head of U.S. rates
strategy at Societe Generale, said that while inflation was elevated
last month, there were also signs that the cost of services
moderated, suggesting that outside of tariffs, prices are cooling.
Yet Joe Brusuelas, chief economist at RSM, a tax and consulting
firm, says that higher-income households are still spending
sufficiently to push some prices higher, such as hotel and airfare
costs, which leapt last month. Such spending could keep inflation
stubbornly high even in a weak job market, he said.
“The Fed’s getting ready to cut into a sustained increase in
prices,” he said. “Very unusual spot. ... we can see tariff induced
inflation in a slow, steady and methodical manner."
Goods prices picked up last month, a sign Trump's sweeping tariffs
are pushing up costs. Gas prices jumped 1.9% just from July to
August, the biggest monthly increase since a 4% rise in December.
Grocery prices climbed 0.6%, pushed higher by more expensive
tomatoes, apples, and beef. Rental costs also increased, rising
0.4%, faster than the previous month.
Clothing costs rose 0.5% just last month, though they are still just
slightly more expensive than a year ago. Furniture costs rose 0.3%
and are 4.7% higher than a year earlier.
Some restaurant owners have boosted prices to offset the rising
costs of food. Cheetie Kumar, who owns Mediterranean eatery Ajja in
Raleigh, North Carolina, said she’s facing higher costs on
everything ranging from spices she imports from India, coffee and
chocolate she gets from Brazil, and soy she gets from Canada.
“Those are things that I cannot source locally, we do source a lot
of produce and meat and everything else from local farmers, but I
don’t know any nutmeg growers in North Carolina," she said.
Her overall costs are up about 10% from a year ago, with beef costs
up 7%, and much bigger increases for things like coffee, chocolate
(300%) and spices (100%).
She’s raised prices on some of her menu items by $1 or $2, but said
she’s at the limit of how much she can do so before demand wanes and
she stops earning a profit.
Bigger companies are also feeling the pinch.
E.L.F. Cosmetics said this spring that it was raising prices by $1.
Last month, however, CFO Mandy Fields said it is no longer certain
whether the $1 price increases will be enough to offset rising
tariff costs.
Shoppers have yet to feel the big sting that economists had
predicted earlier in the year. Many retailers ordered goods ahead of
tariffs and have also absorbed a big chunk of the costs rather than
passing them along to consumers, who’ve grown increasingly leery of
price increases.
But Walmart and other big chains have warned of costs increases as
they replenish their inventories, with the full impact of tariffs in
effect.
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AP Business Writer Anne D'Innocenzio contributed from New York. AP
Business Writer Mae Anderson contributed from Nashville.
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