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US inflation rose to 2.9 per cent in August, underscoring the Federal Reserve’s challenge of balancing stubbornly high price growth with signs of a cooling labour market just days before a critical decision on interest rates.

Data released Thursday by the Bureau of Labor Statistics showed the annual consumer price index rising from July’s 2.7 per cent, in line with analysts’ forecasts. Core inflation, which excludes food and energy, held steady at 3.1 per cent, suggesting that the impact of President Donald Trump’s tariffs on underlying price pressures remains contained.

A separate labour department report showed 263,000 Americans filed first-time claims for jobless benefits last week, up from 236,000 previously and well above Wall Street’s estimate of 235,000. It marked the highest level of initial claims since October 2021.

Daniel Hornung, a fellow at the Stanford Institute for Economic Policy Research and former adviser to ex-president Joe Biden, said the data points towards imminent Fed action. “If you take the stronger evidence we’re now seeing of a weakening in the labour market with the modest inflationary effect that tariffs are now having, it feels like a September cut is pretty much locked in,” he said.

Markets reflected similar sentiment, with traders maintaining bets on a quarter-point cut next week while also pricing in a faster pace of reductions later this year. The two-year Treasury yield, highly sensitive to monetary policy expectations, briefly dropped 0.07 percentage points to 3.49 per cent before settling at 3.53 per cent.

The jobs outlook has added to the pressure on policymakers. The US economy created only 22,000 jobs in August, according to figures released last week, raising concerns that hiring momentum is faltering. The BLS also revised down employment growth for the year to March 2025 by 911,000 jobs, suggesting the labour market slowdown began earlier than expected.

Joe Lavorgna, economic counsellor to US Treasury Secretary Scott Bessent, said the numbers strengthen the Trump administration’s calls for more aggressive easing. “It’s clear that the labour market is not anywhere near as strong as people thought it was when President Trump took office in January,” he said. “As the secretary has said, we could use a much bigger recalibration of interest rates.”

Fed Chair Jay Powell has already signalled openness to a rate cut, warning last month that weakening employment conditions would limit inflation risks from the administration’s sweeping tariff regime.

Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, said the central bank still has room to manoeuvre. “While inflation may rise further in the coming months, the Fed is likely to draw comfort from anchored inflation expectations and the absence of overheating in the labour market, which reduce the risks of second-round effects,” he said.

After cutting borrowing costs by a full percentage point last year, the Fed has since held rates steady in the 4.25 to 4.5 per cent range as it assesses the economic fallout of the ongoing US trade war.

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