Inflation likely rose last month as Trump's sweeping tariffs boost goods prices

Key Points

• U.S. inflation is projected to have increased to 2.9% in August, driven by the Trump administration's tariffs, which raise the price of goods.
• The Federal Reserve faces a dilemma as rising inflation may hinder its ability to cut interest rates, despite a 4.3% unemployment rate and signals indicating a potential need for rate cuts.
• Core inflation, excluding food and energy, is expected to remain steady at 3.1%, which is above the Fed's 2% target.
• Despite inflation concerns, Wall Street anticipates that the Fed will implement three interest rate cuts this year, as the impact of tariffs may be viewed as a one-time price increase.

WASHINGTON (AP) — U.S. inflation likely ticked higher last month as the Trump administration's import taxes have lifted the price of goods, potentially putting the Federal Reserve in a tough spot when it meets next week.

Economists forecast that consumer prices rose 2.9% in August from a year earlier, according to a survey of economists by data provider FactSet. That would be an increase from an annual pace of 2.7% in July. Excluding volatile food and energy costs, core inflation is expected to have increased 3.1%, the same as in July. Both figures are above the Fed’s 2% inflation target.

The potential increases, while modest, would underscore the challenges the Fed is facing as it experiences relentless pressure from President Donald Trump to reduce its short-term interest rate. Trump hopes that rate cuts will spur more borrowing and spending and boost the economy.

Recent government reports have also shown that hiring has slowed sharply in recent months and was lower than previously estimated last year, a sign that companies may be worried about future sales and are less interested in adding staff. The unemployment rate ticked up in August to a still-low 4.3%.

Typically the Fed would cut its key rate when unemployment rose to spur more spending and growth. Yet it would do the opposite and raise rates — or at least keep them unchanged — in the face of rising inflation. Last month, Chair Jerome Powell signaled that Fed officials are increasingly more concerned about jobs, and are likely to cut their rate when they meet next week. Yet stubbornly high inflation could keep the Fed from cutting very quickly.

On a monthly basis, prices are expected to have risen at an accelerated pace, increasing 0.3% from July to August. Core prices are expected to also increase 0.3% on a monthly basis. The cost of groceries and gas are forecast to have risen last month.

Still, Powell suggested in remarks in August that tariffs could simply lead to a one-time increase in prices, rather than ongoing inflation. If so, that would make it easier for the Fed to keep cutting its key rate. Wall Street investors expect the Fed to implement three cuts this year, according to futures pricing tracked by CME Fedwatch.

The inflation data arrives at the same time that Trump has sought to fire Fed governor Lisa Cook as part of an effort to assert more control over the Fed. Yet late Tuesday, a court said the firing was illegal and ruled that Cook could keep her job while the dispute played out in the courts.