Prices climb, jobs wobble: America’s two-front economic headache

Inflation is heating up again just as the job market loses steam — a nasty combo that leaves the Federal Reserve, businesses, and households with few easy options.

The Consumer Price Index rose 0.4% in August, pushing annual inflation to 2.9%, the highest since January. Core inflation (which strips out food and energy) ticked up 0.3% on the month and held at 3.1% year over year, according to Thursday’s Bureau of Labor Statistics report.

The sting was obvious in the basics. Grocery prices jumped 0.6% in a single month (the biggest pop in nearly three years). Gas rose 1.9% after falling in July. Shelter — the CPI’s heavyweight — climbed 0.4% on the month; on a yearly basis, shelter inflation eased to 3.6%, the lowest in almost four years but still the largest single driver of August’s gain.

“Fresh fruits and vegetables up 2% in one month — it is striking,” said Dean Baker of the Center for Economic and Policy Research. “This is mass deportations and tariffs.”

He argued labor shortages on farms — “crops rotting in the fields” — and higher import taxes are feeding straight into prices.

Paychecks aren’t keeping up. Inflation-adjusted hourly earnings are up just 0.7% over the past year, the weakest since mid-2024. That gap fuels the perception that the economy is sliding even when headline data says otherwise.

“Even if real earnings are up, consumers don’t perceive it that way,” said Tyler Schipper of the University of St. Thomas. “This report indicates that things at the grocery store are still getting more expensive. That’s just going to harden those beliefs that their economic worlds aren’t getting better.”

Fresh labor data flashed yellow. Weekly jobless claims jumped by 27,000 to 263,000 for the week ended Sept. 6 — the highest since October 2021 — while earlier payroll revisions show weaker hiring through the spring and summer. The unemployment rate edged up in August. Layoffs aren’t surging, but momentum is clearly slower.

That one-two punch — hotter inflation and a cooler job market — is exactly what the Fed doesn’t want heading into next week’s policy meeting.

“The latest inflation data does support the notion that inflation is reaccelerating, but at a gradual pace,” wrote Morningstar’s Preston Caldwell. “It won’t stop the Fed from cutting next week.”

Markets agree. Traders put the odds of a quarter-point rate cut near certainty, with a slim chance of a larger half-point move. Stocks rallied on the day.

Still, some economists warned the CPI mix complicates rate-cut math.

“This larger-than-expected increase is not good news for the Federal Reserve,” said Eugenio Aleman at Raymond James. “The broad-based increase will further increase market concerns about future inflation and make the Fed’s decision to lower rates more difficult.”

Economists have been watching “core goods” like a hawk for tariff pass-throughs. August delivered:

• Core goods rose 0.3% on the month, the fastest in seven months.
• Durable goods ex-vehicles rose 0.5% in August and are running at an 8.5% annualized pace in the past three months — “clearly showing the impact of tariffs,” Caldwell noted.
• New vehicles (+0.3%) and used vehicles (+1.0%) firmed after months of calm, consistent with higher import costs.
• Heavily imported items surged: sewing machines/fabric/supplies (+9.1%), jewelry (+6.8%), women’s outerwear (+4.4%), instant coffee (+4.9%), tomatoes (+4.5%), beverage materials (+2.8%), bananas (+2.1%).
• Airfares spiked 5.9% as travel demand rebounded and costs climbed.

“We witnessed a widening breadth of inflation pressures in August and saw upticks in some trade-exposed sectors for the first time… setting a concerning precedent for the inflation trajectory,” said RBC’s Carrie Freestone.

There are also signs firms delayed price hikes in hopes courts or new trade deals would ease tariff rates — hopes that didn’t materialize.

“We continue to anticipate additional firming of consumer inflation readings in coming months,” wrote JPMorgan economist Michael Hanson, noting companies are now more likely to pass costs through.

And then there’s energy and utilities: electricity rose 0.2% on the month and 6.2% year over year, a squeeze that could linger if power demand from AI data centers and manufacturing keeps climbing.

“Tariffs are a tax,” said Nancy Lazar, chief global economist at Piper Sandler. “Weak consumer spending is going to put downward pressure on certain prices,” but the tariff-driven goods side remains a headwind.

The Fed’s benchmark rate sits at 4.25%–4.5%. A cut next week looks baked in as officials try to cushion a softer labor market. The bigger question is the glide path: how quickly to move, and how to balance tariffs’ upward nudge on prices against rising jobless claims.

LPL Financial’s Jeffrey Roach says the Fed could hold in October if inflation expectations wobble. Barclays’ Jonathan Hill expects quarter-point cuts at consecutive meetings toward a “neutral” rate around 3%, assuming shelter inflation keeps easing and tariff effects fade in 2026.

Baker cautioned against an outsized cut now:

“A half-point would send a panic signal into the market.”

He also pointed to policy contradictions — restricting renewables while power demand rises — that make fighting inflation tougher:

“We aren’t pursuing anti-inflation policies at all — kind of the opposite.”

Prices are rising faster again, led by groceries, gas, shelter, and tariff-exposed goods. Job market resilience is fraying — claims are up, hiring has slowed, and wage gains aren’t keeping pace with what people feel at the checkout. The Fed will likely cut, but one move won’t fix the grocery aisle or convince nervous workers their jobs are safe.

Until tariffs, labor shortages in key sectors, and energy constraints ease, the economy will keep fighting on two fronts — with households stuck in the middle.

With input from CNN, Politico, NPR, the New York Times, and CNBC.