Inflation Increase
US inflation picked up slightly in August as the consumer price index (CPI) gained 2.9% in the last year the biggest since January. Core CPI, which doesn’t include fluctuating food and energy prices, was stable at 3.1%, the same as July. Economists said the rise was due to firms passing along tariff expenses to consumers.
In spite of the rise, Wall Street continues to be optimistic that the Federal Reserve will cut interest rates at its next meeting, reflecting confidence that inflation is accelerating at a controllable rate.
Jobs Market Drives Fed Expectations
Investors are expecting a quarter-point reduction in rates, with rates at present ranging from 4.25% to 5.5%. Rates have remained unchanged in the last year on the part of the Fed, citing economic uncertainty related to federal trade and immigration policies. Elevated rates serve to curb inflation but may also reduce job growth.
Fed Chairman Jerome Powell, at the Jackson Hole symposium in August, emphasized that while tariffs are pushing prices higher, deteriorating job-market conditions are increasingly a concern. Powell cautioned that “downside risks to employment are increasing” because sudden layoffs or increasing unemployment can become reality in a very short period if the labour market decelerates.
Current data confirms these worries, initial jobs reports for May and June were downwardly revised by 258,000, with June subsequently registering negative job growth the first such drop since December 2020. The jobless rate also inched up to 4.3%, a high not reached since 2021.
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Market Reaction and Outlook
The producer price index (PPI) that monitors wholesale prices dipped slightly in August after a sharp hike in July, raising investor hopes. Markets are now eagerly waiting the Fed’s September 17 announcement for possible rate changes.
The Fed’s long-term objective continues to be to reduce inflation to 2%, a level not achieved since the beginning of 2021. Commentators observe that finding a balance between controlling inflation and slowing down the labour market will be the Fed’s priority in managing the complicated economic environment.
