Inflation is like fire and employment is like ice: When will the Fed’s “hot potato” be resolved?
2025-09-12 08:58:12
The latest data shows that last month, US inflation data accelerated like an unbridled wild horse, while signals from the job market drifted like leaves in the autumn wind. The collision of these two forces has put Federal Reserve policymakers in a dilemma: on one hand, there is pressure from rising prices, and on the other hand, there are concerns about the labor market. Next week's interest rate cut meeting is bound to be difficult.
Looking back to last month, the U.S. Department of Labor's report released on Thursday (September 11th) clearly showed that the Consumer Price Index climbed 2.9% year-on-year in August. This was not only the highest level since the beginning of the year, but also significantly higher than the 2.7% in July and the low of 2.3% in April. Forecasters had long anticipated that businesses would gradually pass the additional costs of import tariffs on to consumers, and this data confirms their prediction. Consider the accelerating price increases for everyday essentials like cars and clothing, along with rising costs for essentials like food and housing. While this increase was expected, it seeped quietly into every household's bills like a warm current.
More notably, after excluding volatile items like food and energy—what economists often call core inflation—price growth reached 3.1% year-on-year, also in line with market expectations. Overall, this year's price trends are far less dramatic than in the spring, when President Trump's announcement of massive tariff increases sparked widespread panic. The report reveals a subtle signal: wholesalers and retailers appear to be extending the cost-passing cycle, preventing a sharp price "explosion." Daniel Hornung, a policy researcher at the Stanford Institute for Economic Policy Research, pointed out that while this is bad news, given that inflation is steadily climbing, it's good news that it's not out of control.
In stark contrast to the strength of inflation, signs of labor market weakness are gathering like dark clouds. Adding fuel to the fire, Thursday's data showed a sharp jump in seasonally adjusted initial unemployment claims last week, reaching their highest point since October 2021. While this figure may be influenced by short-term factors like the holiday-shortened workweek, it serves as a mirror to deeper concerns. This summer, job growth has shifted from a roaring pace to a faltering one, while the unemployment rate has been climbing at a slow but steady pace.
If this upward trend in initial unemployment claims continues, the consequences could be dire. It often signals that more businesses are tightening hiring, or even resorting to layoffs. The labor market equilibrium of the past two years, characterized by relatively stable hiring and firing, is at risk of being disrupted. Sarah House, senior economist at Wells Fargo, observed that price fluctuations for tariff-related goods have been uneven: autos and apparel have seen sharp increases, while tires and furniture have seen a more moderate rise. However, overall, commodity prices remain stubbornly upward, exacerbating labor market pressures.
The stock market, however, reacted with surprising optimism, with all three major US stock indexes hitting new highs. Investors are betting that the Federal Reserve will initiate rate cuts at next week's meeting, followed by subsequent rate cuts at subsequent meetings. Last week's dismal August jobs report had already fueled the fire for a September rate cut, and Thursday's inflation data added further fuel. However, this leaves an unresolved question: how aggressively will the Fed proceed with rate cuts when evidence of labor market weakness is insufficient? Officials, including Chairman Powell, have signaled in recent weeks that a cooling labor market bolsters their view of inflation as a one-off rather than a persistent problem.
A core dilemma the Federal Reserve has wrestled with all year is whether tariff-induced inflation will be a flash in the pan or a deep-seated cost spiral. For example, will rising costs spur workers to collectively chase higher wages, as they did in 2021 and 2022? The answer to this question may not emerge until next year, making current policymaking treading on thin ice. The more tangible impact is already evident: companies like Hormel Foods, Smoky's, and Ace Hardware are citing rising meat prices and tariffs as justification for price hikes. Retail giants like Walmart, Target, and Best Buy have already implemented some tariff-related price increases, with more adjustments imminent. The Trump administration once vowed that tariffs would not fuel inflation but would make the United States richer, but the reality seems to be contradicting this.
Grocery prices saw particularly sharp increases, jumping 0.6% month-over-month in August after a slight decline in July. Over the past year, coffee prices have soared 21%, followed by raw steak, which has increased by 17%, and apples, which have increased by 10%. These aren't abstract numbers; they're tangible realities on supermarket shelves, forcing consumers to take a second look at their wallets at the checkout.
The Federal Reserve's preferred personal consumption expenditures (PCE) price index will be released by the Commerce Department later this month, and forecasts suggest the August data may be much milder than the CPI, as the PCE is based on the CPI and Wednesday's wholesale price index. Stephen Juneau, senior economist at Bank of America, commented that from the Fed's perspective, the report isn't too bad, especially since they are more concerned about the mild signal from the PCE.
The intertwined web of stubborn inflation and languishing employment is not only testing the Federal Reserve's wisdom but also quietly eroding consumer confidence. Sarah House lamented that while this price increase is far less than the rare price surges of the past few years, consumers are no longer as resilient as they once were. Faced with a bleak job market, their ability to absorb the pressure is being eroded. The Fed's next move will determine the outcome of this tug-of-war: will it decisively cut interest rates to stabilize employment, or adopt a cautious wait-and-see approach to prevent a resurgence of inflation? Regardless, this "hot potato" has become a burden on everyone, and the days ahead are likely to be filled with uncertainty.
Inflation rebounds: the hidden driver of rising prices of necessities
Looking back to last month, the U.S. Department of Labor's report released on Thursday (September 11th) clearly showed that the Consumer Price Index climbed 2.9% year-on-year in August. This was not only the highest level since the beginning of the year, but also significantly higher than the 2.7% in July and the low of 2.3% in April. Forecasters had long anticipated that businesses would gradually pass the additional costs of import tariffs on to consumers, and this data confirms their prediction. Consider the accelerating price increases for everyday essentials like cars and clothing, along with rising costs for essentials like food and housing. While this increase was expected, it seeped quietly into every household's bills like a warm current.
More notably, after excluding volatile items like food and energy—what economists often call core inflation—price growth reached 3.1% year-on-year, also in line with market expectations. Overall, this year's price trends are far less dramatic than in the spring, when President Trump's announcement of massive tariff increases sparked widespread panic. The report reveals a subtle signal: wholesalers and retailers appear to be extending the cost-passing cycle, preventing a sharp price "explosion." Daniel Hornung, a policy researcher at the Stanford Institute for Economic Policy Research, pointed out that while this is bad news, given that inflation is steadily climbing, it's good news that it's not out of control.
Undercurrents in the job market: The chill in employment behind the surge in unemployment claims
In stark contrast to the strength of inflation, signs of labor market weakness are gathering like dark clouds. Adding fuel to the fire, Thursday's data showed a sharp jump in seasonally adjusted initial unemployment claims last week, reaching their highest point since October 2021. While this figure may be influenced by short-term factors like the holiday-shortened workweek, it serves as a mirror to deeper concerns. This summer, job growth has shifted from a roaring pace to a faltering one, while the unemployment rate has been climbing at a slow but steady pace.
If this upward trend in initial unemployment claims continues, the consequences could be dire. It often signals that more businesses are tightening hiring, or even resorting to layoffs. The labor market equilibrium of the past two years, characterized by relatively stable hiring and firing, is at risk of being disrupted. Sarah House, senior economist at Wells Fargo, observed that price fluctuations for tariff-related goods have been uneven: autos and apparel have seen sharp increases, while tires and furniture have seen a more moderate rise. However, overall, commodity prices remain stubbornly upward, exacerbating labor market pressures.
The Fed's crossroads: the tug-of-war between rate cut expectations and inflation concerns
The stock market, however, reacted with surprising optimism, with all three major US stock indexes hitting new highs. Investors are betting that the Federal Reserve will initiate rate cuts at next week's meeting, followed by subsequent rate cuts at subsequent meetings. Last week's dismal August jobs report had already fueled the fire for a September rate cut, and Thursday's inflation data added further fuel. However, this leaves an unresolved question: how aggressively will the Fed proceed with rate cuts when evidence of labor market weakness is insufficient? Officials, including Chairman Powell, have signaled in recent weeks that a cooling labor market bolsters their view of inflation as a one-off rather than a persistent problem.
A core dilemma the Federal Reserve has wrestled with all year is whether tariff-induced inflation will be a flash in the pan or a deep-seated cost spiral. For example, will rising costs spur workers to collectively chase higher wages, as they did in 2021 and 2022? The answer to this question may not emerge until next year, making current policymaking treading on thin ice. The more tangible impact is already evident: companies like Hormel Foods, Smoky's, and Ace Hardware are citing rising meat prices and tariffs as justification for price hikes. Retail giants like Walmart, Target, and Best Buy have already implemented some tariff-related price increases, with more adjustments imminent. The Trump administration once vowed that tariffs would not fuel inflation but would make the United States richer, but the reality seems to be contradicting this.
The pain points of food price increases: Everyday surprises from coffee to apples
Grocery prices saw particularly sharp increases, jumping 0.6% month-over-month in August after a slight decline in July. Over the past year, coffee prices have soared 21%, followed by raw steak, which has increased by 17%, and apples, which have increased by 10%. These aren't abstract numbers; they're tangible realities on supermarket shelves, forcing consumers to take a second look at their wallets at the checkout.
The Federal Reserve's preferred personal consumption expenditures (PCE) price index will be released by the Commerce Department later this month, and forecasts suggest the August data may be much milder than the CPI, as the PCE is based on the CPI and Wednesday's wholesale price index. Stephen Juneau, senior economist at Bank of America, commented that from the Fed's perspective, the report isn't too bad, especially since they are more concerned about the mild signal from the PCE.
Conclusion: Consumer confidence is wavering, and the specter of economic "stagflation" has reappeared.
The intertwined web of stubborn inflation and languishing employment is not only testing the Federal Reserve's wisdom but also quietly eroding consumer confidence. Sarah House lamented that while this price increase is far less than the rare price surges of the past few years, consumers are no longer as resilient as they once were. Faced with a bleak job market, their ability to absorb the pressure is being eroded. The Fed's next move will determine the outcome of this tug-of-war: will it decisively cut interest rates to stabilize employment, or adopt a cautious wait-and-see approach to prevent a resurgence of inflation? Regardless, this "hot potato" has become a burden on everyone, and the days ahead are likely to be filled with uncertainty.
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