Inflation ticks up in August, complicating Fed’s rate cut path

Updated Thu, Sep 11, 2025, 7:55 AM 3 min read

Inflation edged higher in August, government data showed Thursday, as investors looked for signs of how much President Trump’s tariffs are filtering into consumer prices and what that means for how aggressively the Federal Reserve will cut interest rates.

The latest data from the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) increased 2.9% annually in August, a rise from July's 2.7% increase and on par with economist expectations.

Month over month, prices rose 0.4% compared to July's 0.2% increase, an uptick compared to economists' expectations of a 0.3% monthly gain. The rise was driven by stickier gasoline prices and firmer food inflation.

Core inflation, which strips out volatile food and energy, rose 3.1% year over year in August, unchanged from July and in line with estimates. On a monthly basis, core prices climbed 0.3%, matching July’s increase, which was the strongest monthly rise in six months.

Tuesday's report arrives as the Fed debates its next interest rate move. Despite stickier prices in August, markets still expect the Fed to deliver a quarter-point cut at next week's policy meeting, according to the CME FedWatch tool.

Odds of a larger half-point reduction have risen in recent days, especially after preliminary benchmark revisions showed the US economy added 911,000 fewer jobs in the 12 months through March 2025 than initially reported.

Fresh data on Thursday added to the picture of a cooling labor market, with weekly jobless claims rising to 263,000 — the highest in four years, up from a revised 236,000 the prior week and well above expectations for 235,000.

Following the release, traders priced in roughly 88% odds of a quarter-point cut and 11% odds of a half-point move, showing slightly more conviction for a larger reduction than the day before. By year-end, markets still expect the Fed to cut rates by a total of 75 basis points.

“The August U.S. CPI report is unlikely to sway the Fed from reducing its funds target rate by 25 basis points next week,” Thierry Wizman, global FX and rates strategist at Macquarie Group, wrote in reaction to the data. “But a higher-than-expected print could push the Fed to strike a more cautious forward-looking tone, and potentially influence the 2026 dots."

Wizman added investors will be watching closely to see whether areas of the CPI less influenced by tariffs, like core services, are cooling enough to support a prolonged rate-cutting cycle.

There were some encouraging signs in August: the pickup in sticky services inflation seen in July eased in certain categories. Medical care services fell 0.1% after jumping 0.8% the prior month, while recreation and communication also declined. Airline fares, however, continued to climb, rising 5.9% in August after a 4% increase in July.