(Yahoo! Finance) - A stickier inflation report isn't likely to kick the Federal Reserve off course for an interest rate cut next week, but it is likely to prevent the central bank from making a jumbo cut of half a percentage point.
The Consumer Price Index showed "core" prices, excluding volatile food and energy prices, rose 3.1% for the month of August, in line with expectations and holding the same level as July. Month over month inflation also held steady at 0.3%.
On a headline basis, inflation rose by 2.9% in August, compared with 2.7% in July. Month over month was slightly hotter than expected at 0.4%, compared with expectations for 0.3%
"Despite a slightly firmer gain in the core CPI in August amid broad increases in goods, services and shelter prices, there was not much for the FOMC to fret about," Capital Economics economist Stephen Brown said. "That cements the case for a 25-basis point cut next week, rather than providing any support for a larger 50 basis point move."
The new reading on consumer prices comes after a report from the Bureau of Labor Statistics released on Wednesday showed wholesale prices unexpectedly dropped in August and firms took a hit to their margins, implying that businesses are eating tariffs rather than passing them on to consumers.
At the same time, data on the jobs market shows softening. Thursday's initial jobless claims, a real-time indicator of the job market, jumped to 263,000, the highest level in four years. And the latest government jobs report showed the economy added 22,000 jobs in August, weaker than the 75,000 economists expected, with the unemployment rate rising to 4.3% from 4.2%.
Job growth for June was revised into negative territory to -13,000 jobs. July showed below-trend growth compared with the past year, marking three months of slowing job growth.
The inflation data on Thursday was the last major data point before the Fed's meeting next Tuesday and Wednesday. Markets are pricing in near certainty for a 25 basis point rate cut.
Fed Chair Jerome Powell opened the door to lowering rates at the end of August in a speech in Jackson Hole, Wyo., noting that the balance of risks appears to be shifting, which "may warrant adjusting our policy stance."
Former Kansas City Fed president Esther George said she thinks the job market data since Powell's speech corroborates the sense that the labor market is weakening: "It's softer maybe than we even thought, over the past few months and so," George said in an interview. "I don't think I've heard anyone try to dissuade markets that a 25 basis point cut isn't coming, so I expect they will cut rates."
However, George said Thursday's inflation report on consumer prices did not assuage her concerns that inflation is sticky and continues to run well over the Fed's target. That leads her to believe inflation has stalled out around 3%.
"I did for a while think that you'd get a burst of inflation from the tariffs, but we're not seeing that, and I don't know if we will see that," she said. "The more concerning thing to me is just the underlying momentum that inflation has had, and we're continuing to push that out in a forecast."
The data comes as the central bank has been under extreme pressure from President Trump to cut interest rates and as his nominee to the Fed, Stephen Miran, who will replace former Fed governor Adriana Kugler, is set to be confirmed by the full Senate on Monday. Miran will offer another dovish voice to the Fed.
At the same time, a US district court judge ruled Tuesday that President Trump did not have cause to fire Fed governor Lisa Cook due to mortgage allegations and that Cook may remain in place as a Fed governor. The Trump administration said in a court filing Wednesday that it was appealing the decision. The president has been pushing to try to get more of his own nominees on the board of the central bank in time for the September policy meeting as he pushes for lower rates.
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance.
By Jennifer Schonberger - Senior Reporter
