Household budgets took a hit in August as consumer prices rose at their fastest pace since January. Driven by rising housing and grocery costs, inflation rose 2.9% annually last month compared to 2.7% in July.

On a month-over-month basis, the seasonally adjusted consumer price index (CPI) climbed 0.4% in August after rising 0.2% in July, according to U.S. Bureau of Labor Statistics (BLS) data.

Core CPI, which excludes more volatile food and energy prices, increased 0.3% in August — the same rate as July. On a 12-month basis, core inflation was up 3.1% last month, also matching July’s increase.

Though headline inflation remains above the Federal Reserve’s stated 2% target, Thursday’s CPI report is not expected to derail a near-certain interest rate cut following the Fed’s policy meeting next week. Steadily rising inflation and deteriorating labor conditions complicate the Fed’s decision-making process for the pace of additional rate cuts as Trump administration tariffs on foreign imports begin to raise prices at home.

Jackie Benson, an economist at Wells Fargo, told Scotsman Guide that her team expects 125 basis points of easing by next June, lowering the benchmark federal funds rate to a range of 3% to 3.25% from its current range of 4.25% to 4.5%.

“The Fed is in the very difficult position of trying to achieve both sides of its dual mandate,” Benson says. “Inflation is firming and the labor market is softening — each of which traditionally requires an opposite interest rate response.”

Wednesday’s BLS update to the producer price index showed overall supply chain inflation cooling in August, but rising for the fourth consecutive month for wholesale goods. Calls for the Federal Reserve to shore up employment with a rate cut have grown louder in recent weeks, a move that would reflect a shift by the Fed away from its inflation mandate.

“Interest rate cuts should stimulate economic activity next year, as should the tax cuts and less restrictive regulations enacted by the government,” Benson adds. “Weak labor supply is keeping the unemployment rate lower than it otherwise might be.”

The path to accelerated hiring and job creation through rate cuts may not be as direct as assumed, however.

“A rate cut isn’t a silver bullet for hiring,” Sam Williamson, senior economist at First American, told Scotsman Guide. “The Fed’s shift looks more like a rebalancing of risk than a push to stimulate the labor market.”

Lower interest rates generally translate to lower consumer credit costs, helping to increase consumer spending on goods and services, which can in turn drive job creation. Rising inflation can complicate that process if a rate cut fuels further consumer price increases. Consumer spending accounts for nearly 70% of U.S. gross domestic product.

With as much as half of all consumer spending driven by the top 10% of income earners — defined as households making $250,000 annually or more — the prospect of increased consumer spending among low- and middle-income households diminishes as prices continue rising.

The main drivers of inflation in August directly hit household budgets. Shelter costs, which include rents and hotel rooms, jumped 0.4% month over month, while food prices increased 0.5%. The cost of food consumed at home surged 0.6% in a signal that tariff-driven price hikes are beginning to seep into expenses consumers are bearing.

“I haven’t completely thought this through, but nothing immediately comes to mind where you would see labor impact help from a rate cut,” says Selma Hepp, chief economist at the real estate market analytics firm Cotality.

Lower interest rates mean lower borrowing costs for business, too, who can take advantage of lower capital costs to invest. Generalized economic uncertainty undermines assumptions that business spending will increase measurably, though. A large share of recent job losses has occurred in industries awaiting certainty on U.S. tariff policy, such as trade, transportation and manufacturing.

A recent survey of consumers conducted by the Federal Reserve Bank of New York’s Center for Microeconomic Data showed consumers’ perceived probability of finding a job if laid off at the lowest mark in 12 years’ worth of data.

Hepp sees the Fed allowing inflation to run hotter than desired to avoid a demand shock across goods and services should job losses accelerate in the months ahead — even though a demand shock could undercut price hikes, aiding the Fed’s attempts to tame inflation.

“You lose some of the inflation pressure if you have less demand, that’s for sure,” she explains. “A recession would help mortgage rates. It’s very unpopular, but it’s kind of true. What helps affordability? Well, declining home prices, but nobody wants to hear that.”

Rather than jump-starting growth with a rate cut, First American’s Sam Williamson sees the Fed managing downside risk. Economic uncertainty that has dampened spending and investment will likely nudge the Fed toward a more neutral stance on interest rates.

“The hiring slowdown was expected, and the labor market remains relatively stable,” Williamson says. “The risk of a demand shock from job losses may be overstated, but the Fed isn’t taking chances.”