Inflation and Unemployment: A Rough Patch for the Economy
Inflation is on the rise again, with prices for gas, groceries, and airfares jumping significantly. In August, consumer prices went up 2.9% compared to a year earlier, the steepest increase since January. Excluding food and energy, core prices also rose by 3.1%. Both of these figures exceed the Federal Reserve’s target of 2%.
At the same time, more people are asking for unemployment benefits. Applications surged by 27,000 last week, reaching a total of 263,000—something we haven’t seen in nearly four years. This increase indicates that layoffs might be on the rise. Although hiring has slowed, reports suggest current job growth is even weaker than previously believed.
Such rising inflation alongside increasing unemployment recalls “stagflation,” a term that became famous during the 1970s. Stagflation describes a situation where the economy grows slowly, unemployment is high, and inflation keeps rising. It’s unusual because typically, a weak economy helps keep inflation low.
As the Fed prepares for its upcoming meeting, policymakers may cut the short-term interest rate from 4.3% to about 4.1%. This decision is complicated. While President Trump has pushed for rate cuts, stubborn inflation and a weakening job market create conflicting pressures.
The traditional approach would have the Fed cut rates to encourage spending and boost growth in light of rising unemployment. Yet, with inflation increasing, they could also decide to keep rates steady or even raise them.
Experts like Kathy Bostjancic, chief economist for Nationwide, suggest that despite inflation being higher than expected, it shouldn’t stop the Fed from starting to cut rates soon. A weak labor market emphasizes the need for rate reductions to stimulate the economy. Wall Street anticipates a high chance that the Fed will cut rates multiple times in the coming months.
Looking at inflation patterns, some economists argue that the current spike could be linked to temporary factors like Trump’s tariffs and won’t create long-term issues. They emphasize that a weaker job market could help stabilize wages, subsequently keeping prices down. Subadra Rajappa from Societe Generale notes some signs of price moderation outside of tariffs.
However, other analysts, like Joe Brusuelas from RSM, warn that higher-income households continue to spend on services like travel, pushing some prices higher. This might prevent inflation from dropping significantly, even when the job market weakens.
In August, gas prices surged by 1.9%, the highest increase in several months, while food items also got pricier—grocer costs climbed 0.6% due to rising prices for tomatoes, apples, and beef. Rental costs rose too, reflecting the broader trend of increasing expenses.
Restaurant owner Cheetie Kumar faces higher prices for essential imports, impacting her menu costs. With overall costs up about 10% from last year, she’s raised prices modestly, but worries about losing business if she increases them further. Similarly, E.L.F. Cosmetics announced uncertainty in matching price increases to rising costs due to tariffs.
Larger retailers like Walmart are also forecasting price hikes as they replenish their inventories, reflecting the cumulative effects of tariffs.
In summary, we are at a crossroads with inflation creeping up while unemployment rises. The Fed faces tough choices, and consumers and businesses alike are feeling the pressure from these economic shifts.
For more details on inflation trends, you can refer to this report by the Labor Department.
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Inflation, Economic policy, Federal Reserve System, Jerome Powell, Economic indicators, Jobs and careers, General news, Business, Mandy Fields, Donald Trump, U.S. news, Joe Brusuelas, Kathy Bostjancic, U.S. News
