Inflation increased 0.4 percent in August, all eyes on the Fed’s next move: CEI analysis

The Consumer Price Index report for August showed a 0.4 percent increase in inflation across all sectors. With Trump’s Liberation Day tariffs being implemented and inflation staying elevated, CEI’s Ryan Young says all eyes are on the Federal Reserve’s next interest rate decision.

“The Liberation Day tariffs, which came into effect on August 7, are likely the big driver behind August’s big CPI increase. While inflation over the last year is 2.9 percent, August’s 0.4 percent increase would annualize to nearly 5 percent if it continued at that pace.

“Consumers have been complaining about higher grocery prices. That is now showing up in the data, with food prices increasing 0.6 percent in August, faster than the overall CPI. Clothing, which is mostly imported, is also up faster than CPI, at 0.5 percent during August.

“In theory, tariffs have only a one-time effect on prices. Companies so far have adapted to tariffs with cost-cutting measures such as finding substitutes and stockpiling inventories ahead of new tariffs. This has helped keep price increases relatively small. 

“At some point these kludges will lose their effect. So one-time tariff hikes could still cause ongoing price increases for several months.

“Even so, a return to Covid-era CPI levels is not in the cards if President Trump slows down the pace of new tariffs. If the Supreme Court strikes down the Liberation Day tariffs, CPI might actually fall after the tariffs are removed.

“That doesn’t make the Federal Reserve’s interest rate decision next week any easier. While inflation is higher, the labor market is also showing signs of trouble.

“When the Fed has to choose between inflation control and economic stimulus, it usually chooses stimulus. In this case, there is also presidential pressure to focus on stimulus. While a rate cut is more likely than not, the tradeoff of higher inflation makes it a difficult choice.”