Stagflation concerns rise with increased inflation, jobless claims

Inflation heated up in August to the fastest pace since January as weekly jobless claims climbed to their highest level in nearly four years — fueling worries the economy is sliding into a stagflationary mix of rising prices and weakening growth.

The Labor Department said Thursday that higher housing and food prices put a strain on consumers’ wallets last month, while overall inflation rose to a 2.9% annual rate. Separately, new applications for weekly unemployment benefits jumped to 263,000 last week, the highest since October 2021.

The twin reports could present a thorny challenge for the Federal Reserve, which meets next week to consider its first rate cut of the year — a move President Donald Trump continues to push. But stubborn inflation and a softening labor market complicate the choice: Lower borrowing costs could fuel the economy in ways that keep price pressures elevated.

Concerns over stagflation — rising prices alongside slowing growth — are likely to intensify, said Stephen Kates, a financial analyst at Bankrate. While the sharply cooling job market may still dominate the Fed’s immediate focus, “it no longer guarantees a full cycle of multiple rate cuts,” he said.

“Mild stagflation is our baseline,” Skanda Amarnath, executive director of Employ America, a left-leaning policy organization, said this week. He added that the chance of a recession over the next year is higher than usual, though it’s not the most likely outcome.

New jobless claims jumped by 27,000 in the week ending Sept. 6, compared to the week before, according to the Bureau of Labor Statistics, led by a jump in claims in Texas possibly tied to catastrophic floods over the summer. That report builds on a grim outlook for the labor market, after a separate monthly report on hiring showed weaker-than-expected payroll growth in August.

Investors widely expect a September rate cut, and U.S. stocks were trading higher late morning, after the release of the inflation data was largely in line with economists’ expectations.

Thursday’s consumer prices report showed that “core” inflation, which strips out food and energy and is viewed as a steadier gauge of underlying pressures, rose 3.1% from a year earlier — matching July’s pace. If monthly gains firm over the coming months, some economists warn annual inflation could approach 4% by year’s end.

On a monthly basis, prices rose 0.4% — a bit hotter than expectations. Higher shelter costs were the largest factor in the monthly rise, and food prices also jumped 0.5%.

Despite the president’s sweeping tariff actions, higher costs have filtered into consumer prices more slowly than some analysts expected. Many duties didn’t take effect until weeks or months after they were announced, and companies rushed to stockpile goods before the levies hit — though those inventories are now largely depleted.

Earlier this summer, consumer prices began rising across a broader range of goods and services. June data pointed to notable increases in imports such as cosmetics, shoes and toys, as well as medical care. In July, furniture prices — heavily exposed to tariffs — jumped 0.9%, while tomato prices, hit by duties on Mexican imports, surged 3.3%. Last month, apparel prices rose 0.5% and used car and truck prices rose 1%. New vehicle prices ticked higher after four straight months of declines or no changes.

“Tariff pass-through is going to be gradual into 2026,” said Matt Bush, U.S. economist at Guggenheim Investments. “Eventually it will fade by the end of next year … but in the meantime it’s going to keep inflation at a sticky level.”

The inflation picture is complicated by signs of cooling elsewhere in the economy. Wholesale prices — which measure what companies and producers pay for goods and services — unexpectedly ticked down in August, an unexpected development suggesting some price pressures might actually be easing.

In the labor market, fresh revisions to government data show U.S. employers added far fewer jobs over the summer than initially reported, underscoring a loss of momentum in hiring. The Labor Department said Tuesday that businesses had created 911,000 fewer jobs from April 2024 through March 2025 than earlier estimates suggested — evidence the slowdown was already underway even before Trump’s sweeping new tariffs and immigration policies began squeezing business costs.

The jump in new filings for jobless benefits may signal a pickup in layoffs.

“The latest jobless claims data, along with other recent labor market indicators, show signs of a more vulnerable job market and will lead the Federal Reserve to lower interest rates at its meeting next week,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics, in an analysts’ note.

However some economists argue that the labor market is still mostly solid. Layoffs remain low and the unemployment rate is relatively stable, even as labor supply has dwindled in response to the immigration crackdown.

Lower levels of immigration could mean that fewer new jobs are needed to keep the unemployment rate stable. Fed Chair Jerome H. Powell last month described the dynamic of softening labor supply and demand as a “curious kind of balance” in the jobs market.

Powell, while opening the door to a possible rate cut this month, has also suggested that tariff-driven price increases could prove temporary — more of a one-off jump than a lasting source of inflation — even as he warned that the effects could take months to filter through the economy.