US inflation in August came in higher than expected, but a weakening labour market is now the Federal Reserve's main concern, according to ING's latest analysis.
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Headline consumer price inflation rose by 0.4% month on month, ahead of the 0.3% consensus forecast, while core inflation increased by 0.3%, in line with predictions though "only just given it was 0.346% to three decimal places". Both figures remain above the 0.17% monthly pace required to bring annual inflation back to the Fed's 2% target.
"Inflation was a touch higher than expected and tariffs are likely to keep it elevated over coming months, but the weakening of the jobs market is now the Fed's priority, with rising jobless claims hinting at a pick-up in lay-offs at a time when hiring is subdued," the report stated.
Tariffs have so far had limited visible impact on prices. Airline fares jumped 5.9% and used cars rose 1%, while shelter costs increased 0.4%. Food prices rose 0.5% and energy 0.7%, pushing headline inflation above core. Offsetting factors included declines in recreation (-0.1%) and medical care (-0.2%), while education was flat. Core goods excluding autos, the category most exposed to tariffs, increased by just 0.1%.
This restrained impact suggests that "for now, most of the tariff cost is being absorbed by corporate profit margins, which was also indicated by the hefty 1.7% MoM drop in the PPI measure of trade services yesterday, used as a proxy for corporate margins. We don't expect this to be a permanent feature."
ING noted that tariffs are likely to represent a one-off step change in prices, rather than a source of persistent inflation. Other forces are expected to cool inflation, including falling energy costs, slower housing rents, and a softening labour market. With services dominating the inflation basket and wages being a key driver, the slowdown in pay growth—amid more unemployed workers than vacancies—is seen as decisive.
Labour market weakness was underlined by a sharp rise in jobless claims. Initial claims jumped to 263,000, the highest since October 2021 and well above the 235,000 consensus forecast. This, ING argued, "hints at a pick-up in the pace of lay-offs in an environment of already weak hiring and will re-affirm expectations of a 25bp Fed rate cut next week."
The analysis suggests that while inflation remains elevated, the Federal Reserve is now set to prioritise employment conditions in its policy response.
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