Tariffs helped push up the price of goods and services up by 2.92 percent from a year ago in August — the fourth month in a row that inflation has moved away from the Federal Reserve’s 2 percent inflation goal.

Thursday’s Consumer Price Index report from the Bureau of Labor Statistics all but rules out a 1/2 percentage point “jumbo” rate cut at next week’s Fed meeting, but central bank policymakers are still expected to bring rates down gradually this year and next.

Fed Chair Jerome Powell last month acknowledged that policymakers are starting to see unemployment as a bigger risk to the U.S. economy than inflation.

The Department of Labor reported Thursday that initial jobless claims climbed to a seasonally adjusted 263,000 last week, the highest level since Oct. 23, 2021.

Most of the surprise jump in jobless claims was attributed to the impact of flash floods in July that killed more than 100 people in Texas.

But the report comes on the heels of Sept. 5 payrolls data that showed employers added just 22,000 jobs to U.S. payrolls in August and that the unemployment rate ticked up to 4.3 percent, with 7.38 million Americans out of work.

Jobless claims hit new 2025 high

Forecasters at Pantheon expect the unemployment rate to peak at 4.75 percent early next year, he said.

Tariffs push inflation away from Fed’s target

Since hitting a post-pandemic low of 2.31 percent in April, annual CPI inflation has been climbing for 4 months in a row. Core CPI, which excludes volatile food and energy prices, bottomed at 2.77 percent in May.

Tombs said tariffs were “chiefly responsible” for the rise in August core CPI, which rose to 3.11 percent. Only about 1/3 of the impact that tariffs are ultimately expected to have on prices has been passed on to consumers, he said.

“The middle-class squeeze from tariffs is here,” Navy Federal Credit Union Chief Economist Heather Long posted on X. “It’s troubling that so many basic necessities are rising in price again: Food, gas, clothing and shelter all had big cost jumps in August. And this is only the beginning.”

Forecasters as Pantheon expect the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, to peak at between 3.25 percent and 3.5 percent around the end of the year as retailers pass on more tariff costs to consumers.

“The tariff boost will be fleeting, but weakening services inflation will only be resolved by looser monetary policy,” Tombs said. “We continue to think, therefore, that the [Fed] will reduce rates by [1.5 percentage points] over the next 12 months, with [half] of that easing coming by the end of this year.”

Futures markets tracked by the CME FedWatch tool show that investors were pricing in a 86 percent chance Thursday that the Fed will bring short-term interest rates down by at least 3/4 of a percentage point this year, up from 46 percent on Sept. 4.

But futures market investors think the odds of a 1/2 percentage point Fed rate cut on Sept. 17 are long — about 7 percent on Thursday, down from 9 percent on Wednesday.

Stock market indexes nevertheless hit new all-time highs Thursday on expectations that the Fed will initiate a series of rate cuts next week. Yields on 10-year Treasurys, a barometer for mortgage rates, also came down slightly on investor expectations of a Fed rate-cutting campaign.

Mortgage rates at 2025 low

Rates on 30-year fixed-rate mortgages tracked by Optimal Blue hit a 2025 low of 6.27 percent Monday and Wednesday, and were headed lower Thursday.

Although Optimal Blue data lags by a day, rates tracked by Mortgage News Daily showed rates for 30-year fixed-rate mortgages fell by 2 basis points Thursday, in concert with 10-year Treasury yields. A basis point is one hundredth of a percentage point.