Going to shit...

Inflation jumps as Trump, Powell confront weakening labor market

The crosscurrents of higher prices and a softening job market pose a major headache for Fed policymakers as they prepare to meet next week.

By Sam Sutton

Consumer prices rose in August, partly driven by President Donald Trump’s tariffs, heightening the challenge for Federal Reserve officials who are also grappling with a stall in hiring that could derail economic growth.

The consumer price index climbed at an annual rate of 2.9 percent, the fourth-straight month of acceleration, while a less volatile gauge that excludes food and energy costs remained stuck above 3 percent, according to a Labor Department report released Thursday.

In a separate report, Labor also said new jobless claims climbed to the highest level in nearly four years last week. Recent downward revisions to previously released jobs data indicate that payroll growth was much weaker than many had assumed through the spring and early summer.

The crosscurrents of higher inflation and a softening labor market pose a major headache for Jerome Powell as he navigates the final months of his term as Fed chair. While markets still expect the Fed to lower short-term borrowing costs at a meeting next week, moving too aggressively to cut rates could cause inflation to reaccelerate. By the same token, keeping rates too high will make it harder for employers to bring on more workers.

Powell is expected to announce a quarter-point cut next week to address the troubling signs coming out of the labor market, “but it’s possible the Fed will hold in October if inflation expectations no longer look well-contained,” said Jeffrey Roach, the chief economist for LPL Financial, in a research note.

While August’s inflation was largely driven by price growth in the service sector, there was a notable surge in prices for new and used automobiles — something that has been widely anticipated since Trump slapped new duties on imports — pushing up the overall cost of U.S. goods.

Until recently, Powell and most other central bankers have been reluctant to lower short-term borrowing costs out of fear that it might further stoke inflation. Trump’s tariffs have added hundreds of billions of dollars in costs for domestic companies that rely on imported goods.

Most companies have either absorbed the tariffs or relied on pre-tariff inventories. But there’s a broad expectation among economists that those costs will be reflected in higher consumer prices, which may mean even more inflation in the year to come.

“We witnessed a widening breadth of inflation pressures in August and saw upticks in some trade-exposed sectors for the first time [new motor vehicles] – setting a concerning precedent for the inflation trajectory in the months ahead,” said Carrie Freestone, a U.S. economist at RBC Capital Markets.