US Inflation Rises as Fed Prepares for Interest Rate Cut Amid Weakening Labour Market

Inflation in the United States accelerated to 2.9 per cent in August, with the central bank expected to respond with its first interest rate cut of the year at its upcoming meeting. Consumer price inflation increased from 2.7 per cent in July, matching economists’ forecasts, while core inflation remained steady at 3.1 per cent. Month-on-month price growth also held firm at 0.3 per cent between July and August. This report represents the last major indicator before the Federal Reserve’s interest rate decision scheduled for 17 September.

The Federal Reserve has maintained its policy stance throughout 2025, citing the need to assess the impact of American tariffs on consumer prices. Current US import duties are at their highest since the 1930s, and most economists expect these costs to be passed on to consumers, thereby raising inflation. Despite this, recent data highlighting a sharp rise in jobless claims and an increasingly fragile labour market have shifted the central bank’s focus. Unemployment claims surged by 27,000 to 263,000 in the week ending 6 September, the highest level since October 2021.

Central bankers have signalled that concerns over a softening employment landscape may outweigh inflation targets in the near term. Lower interest rates can stimulate the economy by making borrowing cheaper for businesses, which is expected to support employment and demand for workers. Market participants have placed a 100 per cent probability on a Fed rate cut next week, with a 10 per cent expectation of a bolder half-point reduction. Investors anticipate further policy easing in October and December, projecting borrowing costs to decline from their present range of 4 to 4.25 per cent down to 3.5 to 3.75 per cent by year’s end.

Government bond prices rallied ahead of the anticipated rate move, pushing the yield on two-year US Treasuries down by 0.05 percentage points to 3.49 per cent. The benchmark ten-year treasury yield dipped slightly to 4.01 per cent. Meanwhile, the US dollar reversed its gains on the inflation data, falling by 0.1 per cent against a basket of peers, while sterling remained flat at 1.35 US dollars.

Equity markets responded positively, with the Dow Jones Industrial Index gaining 1.3 per cent, the S and P 500 up by 0.8 per cent, and the technology-focused Nasdaq advancing by 0.66 per cent. Analysts suggest the Federal Reserve will prioritise signs of labour market weakness over momentary rises in inflation. Atakan Bakiskan, US economist at Berenberg, noted these jobless figures underline the Fed’s view of a more vulnerable jobs market.

Investors will be monitoring internal divisions on the Fed’s monetary policy committee closely. The appointment of Stephen Miran, closely aligned with President Trump, to a temporary board seat is set for confirmation, giving him a vote at next week’s meeting. Meanwhile, Governor Lisa Cook remains on the committee after a legal challenge blocked Trump’s effort to dismiss her. Both Miran and Cook are expected to play pivotal roles in shaping the Fed’s imminent policy direction.