Inflation in America peaks after January; Fed likely to cut rates as unemployment rises

Excluding volatile categories such as food and energy, core inflation stood at 3.1%, which is equal to the July level. Both figures are well above the US Federal Reserve’s target of 2%. The picture is also worrying on a monthly basis.

Washington DC: Inflation in the US recorded an unexpected rise in the month of August. Rising prices of gas, groceries, hotel rooms, air travel, clothing and second-hand cars pushed the Consumer Price Index (CPI) up. According to the latest data from the US Department of Labor, consumer prices rose 2.9% year-on-year in August. This is higher than the 2.7% in July and is considered to be the fastest growth since January.

Core Inflation Also Remains High

Excluding volatile categories such as food and energy, core inflation stood at 3.1%, which is equal to the July level. Both figures are well above the US Federal Reserve's target of 2%. The picture is also worrying on a monthly basis. Overall prices rose by 0.4% between July and August, while the figure was only 0.2% in the previous month. Core inflation rose 0.3% for the second consecutive month.

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Double Challenge For Fed

These figures are increasing the challenge for the Federal Reserve (Fed) ahead of the important monetary policy meeting next week. It is being speculated that the Fed may reduce its short-term interest rates from 4.3% to around 4.1%. President Donald Trump is also constantly pressuring the Fed to cut rates. However, rising inflation may prevent the Fed from taking a big step in a hurry.

Unemployment Reached 4.3%

Despite the rise in inflation, the situation on the employment front seems to be worsening. Recent government reports have shown that the pace of job growth has slowed in the last few months. The unemployment rate reached 4.3% in August, which is still low by historical standards, but its increase remains a cause for concern. Weekly unemployment claims have also jumped, indicating that the pressure of layoffs may increase.

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Fed's Tilt On Employment

Normally, when unemployment rises, the Fed cuts rates to spur spending and economic activity. But when inflation is rising, the policy reverses. Last month, Fed Chairman Jerome Powell indicated that officials are increasingly concerned about the employment situation and are likely to cut interest rates. Still, persistently rising inflation could make their decisions tougher.