US consumer inflation rises to 2.9%, the highest since January; eyes now on Fed rate cut next week

US consumer inflation accelerated in August to its highest level in seven months, government data showed Thursday, though analysts say it is unlikely to derail expectations of a Federal Reserve rate cut next week.

The Labour Department said the consumer price index (CPI) rose 2.9 percent year-on-year in August, up from 2.7 percent in July, as tariffs imposed by President Donald Trump gradually filter through the economy.

On a monthly basis, CPI increased 0.4 percent, compared with a 0.2 percent rise in July. Core inflation, which excludes food and energy, climbed 3.1 percent from a year earlier.

Economists polled by Reuters had expected consumer prices to rise 0.3 percent in August and 2.9 percent on an annual basis.

The stronger reading comes amid concerns that tariffs could fuel more sustained price pressures. While the initial pass-through has been gradual, businesses have begun running down pre-tariff inventories, raising the risk of further price increases in the coming months.

The CPI report also follows signs of weakness in the labour market, fanning concerns about possible stagflation. Still, most economists believe the Fed will proceed with a rate cut next week, as policymakers balance inflation risks with the need to shore up slowing growth.

“The evidence is overwhelming that more tariff-related inflation is coming, though it may still be several months before it passes through fully,” Stephen Stanley, chief economist at Santander US Capital Markets told Reuters.

Excluding the volatile food and energy components, the CPI 0.3% after gaining 0.3% in July. In the 12 months through August, the so-called core CPI inflation increased 3.1%. That followed a year-on-year rise of 3.1% in July.

The US central bank, which tracks the Personal Consumption Expenditures (PCE) price indexes for its 2% inflation target, is expected to cut rates at its policy meeting next Wednesday. A quarter-percentage-point reduction has been fully priced in. The Fed paused its easing cycle in January because of uncertainty over the inflationary impact of import duties.

Prior to the CPI data, economists estimated core PCE inflation increased 0.3% in August for a third consecutive month, which would translate to an annual increase of 3.1%. That would be an acceleration from a 2.9% increase in July.

With inputs from agencies