The problem with inflation is that it compounds over time. So, while year-over-year inflation rates have fallen from the breakneck levels seen in 2022, consumers and businesses are still feeling pinched.
This year cash-strapped budgets aren't getting any relief because the Consumer Price Index shows that inflation has been climbing since April, when President Trump's tariffs began taking effect.
BLS/CPI Inflation by month since April:
- July: 2.7%
- June: 2.7%
- May: 2.4%
- April: 2.3%
Worse, the August CPI data, scheduled to be released on Thursday, Sept. 11, are expected to show that prices headed even higher last month, according to Goldman Sachs, further pressuring the economy.
The stakes for the U.S. economy are particularly high because rising inflation could undermine the argument that the Federal Reserve will lower its Federal Funds Rate on Sept. 17.
An economy on the brink?
The U.S. economy is showing signs of growing tired. After GDP growth clocked in at 2.8% in 2024, the World Bank estimates growth will fall by half to 1.4% in 2025. One reason: A wobbly jobs market:
- The Bureau of Labor Statistics report shows the unemployment rate has climbed to 4.3% from 3.4% in 2023 — the worst level since 2021.
- Challenger, Gray & Christmas says the total number of layoffs through August was 892,362 this year, up 66% from a year earlier.
- The Job Openings and Turnover Labor Survey (Jolts report) reveals that 7.2 million jobs were open and unfilled in July, far fewer than in 2022, when more than 12 million jobs were available.
The labor market's weakness typically means that the Federal Reserve will lower interest rates to stimulate economic activity and hiring. However, the Fed has hesitated to reduce rates in 2025 because of the tariffs.
While the White House says tariffs will ultimately spark U.S. manufacturing activity, they're effectively an import tax that hits companies' bottom lines and, in many cases, increases consumer prices.
That's problematic because the Fed's rate policy is dictated by a dual mandate: low inflation and unemployment. Those two goals are contradictory: Reducing interest rates lowers unemployment but causes inflation.
Given that inflation is rising due to tariffs and unemployment is worsening, the Fed finds itself in a corner.
Still, most expect the most recent jobs data are enough to warrant Fed Chairman Jerome Powell pulling the trigger and cutting rates at the policy-making Federal Open Market Committee meeting next week.
According to CME's closely watched FedWatch tool, the odds of a quarter-percentage point cut to interest rates are 93%. The chances for a larger half-point cut are 8%.
Goldman Sachs predicts CPI inflation hit a new high in August
The CPI's acceleration from this spring after Trump's tariff announcements is concerning. But inflation is below 3%, and while that's above the Fed's 2% target, it has been mostly manageable because of wage growth.
Despite layoffs increasing and fewer companies hiring workers, real wage growth, or wages adjusted for inflation, remains positive. According to the Bureau of Labor Statistics, real hourly earnings rose 1.2% year-over-year in July, and alongside an increase in the average workweek, real average weekly earnings were up 1.4%.
So far, wages have outpaced inflation, but that could become more challenging based on Goldman Sachs's estimates for August's CPI inflation report.
"We expect a 0.37% increase in headline CPI (vs. +0.3% consensus), reflecting higher food (+0.35%) and energy (+0.6%) prices," wrote Goldman Sachs economists in a research note. "This corresponds to a year-over-year rate of 2.9%."
Core CPI inflation, which excludes volatile energy and food, is also expected to increase.
"We expect a 0.36% increase in August core CPI (vs. +0.3% consensus), corresponding to a year-over-year rate of 3.13% (vs. +3.1% consensus). We expect a 0.37% increase in headline CPI (vs. +0.3% consensus), reflecting higher food (+0.35%) and energy," said the analysts.
Goldman Sachs cites four reasons that inflation rose in August:
- Used-car prices up 1.2% because of increases in auction prices and fewer dealer incentives on new cars.
- Car insurance up 0.4% based on higher premiums.
- Airline ticket prices up 3%.
- Higher prices for industries most affected by tariffs, including communication, household furnishings, and recreation.
Goldman Sachs isn't alone in thinking that inflation is worsening. Bank of America also expects CPI inflation to climb to 2.9%, which matches the consensus Wall Street estimate.