Inflation in the US economy accelerated to 2.9 per cent in August and a measure of unemployment hit a four-year high in figures that are likely to pave the way for the Federal Reserve’s first interest rate cut of the year next week.
Official data showed annual consumer price inflation rose to 2.9 per cent from 2.7 per cent in July in the world’s largest economy, in line with forecasts from economists. A key measure of core inflation held steady at 3.1 per cent and month-on-month price changes were also stable at 0.3 per cent between July and August.
The inflation figures were the last major economic release before the Fed’s next interest rate decision on September 17. The Fed targets a 2 per cent inflation rate but has said it is worried about a slowing jobs market.
All of the main US indices closed at record levels on Thursday as equity markets digested the figures. The S&P 500 rose by 0.85 per cent to 6,587,47, while the Dow Jones industrial average jumped by 1.36 per cent to 46,108. The tech-dominated Nasdaq Composite also finished at a record 22,043.07, up 0.72 per cent.
Separate figures showed weekly jobless claims jumped by 27,000 to 263,000 in the week ending September 6, more than forecast and the highest since October 2021. Lower interest rates help support employment and demand for workers by lowering the cost of borrowing for businesses.
Jerome Powell, chairman of the central bank, has kept monetary policy unchanged in 2025 as policymakers want to see the impact of US tariffs on consumer prices. Most economists expect import levies on goods, which are at the highest level since the 1930s, to be passed on to American consumers, raising the inflation rate.
Traders are betting there is a 100 per cent probability that the Fed will cut interest rates next Wednesday, with a 10 per cent chance of a larger half-a-percentage-point reduction. Investors think the Fed will also loosen policy in October and December, taking borrowing costs from the current level of 4 per cent-to- 4.25 per cent to 3.5 per cent-to-3.75 per cent by the end of the year.
US government bonds rallied on Thursday before the likely rate cut, pushing down the yield on two-year Treasury bonds by 0.05 percentage points to 3.49 per cent. The yield on benchmark 10-year bonds slipped 0.03 percentage points to 4.01 per cent. Yields fall when the price of a bond rises. The dollar reversed its gains on the inflation numbers, falling back by 0.1 per cent against a basket of major currencies. The pound traded flat against the US currency at $1.35.
Jobless claims jumped by 27,000 to 263,000 in the week ending September 6
JIM YOUNG/BLOOMBERG VIA GETTY IMAGES
Atakan Bakiskan, a US economist at Berenberg, said the Fed was likely to look through the rise in inflation and “prioritise signs of labour market weakness for now”.
The jobless claims figures “reinforce the Fed’s view of an increasingly fragile labour market”, he said.
Splits within the Fed’s monetary policy committee will be closely watched by investors after President Trump appointed Stephen Miran, one of his closest allies, to temporarily fill a vacant seat on the governing board from this month. Miran’s appointment is expected to be confirmed by the Senate on Monday, allowing him to vote in next week’s decision.
The president has also been blocked by a judge in his attempt to fire Lisa Cook, a Federal Reserve governor, after she won an appeal for a temporary restraining order against Trump’s order to fire her immediately. Cook will also be voting at next Wednesday’s meeting.