Rising inflation, dwindling job mkt puts, US in tight spot

Washington: Inflation rose last month as the price of gas, groceries and airfares jumped while new data showed applications for unemployment aid soared, putting the Federal Reserve in an increasingly tough spot as it prepares to cut rates at its meeting next week despite persistent price pressures.

Consumer prices increased 2.9 per cent in August from a year earlier, the Labour Department said Thursday, up from 2.7 per cent the previous month and the biggest jump since January. Excluding the volatile food and energy categories, core prices rose 3.1 per cent, the same as in July. Both figures are above the Federal Reserve’s 2 per cent target.

A separate government report Thursday showed that weekly applications for unemployment aid jumped 27,000 to 263,000, the highest in nearly four years. Requests for jobless benefits are a proxy for layoffs. Recent reports have also showed that hiring has weakened dramatically this year and was lower than previously estimated last year.

The data raises the spectre of “stagflation,” a trend that last bedeviled the US economy in the 1970s. The term refers to a period of slower growth, higher unemployment along with rising inflation. It is unusual because a weak economy typically keeps inflation in check.

Such a scenario could create major headaches for the Fed as it prepares for a meeting next week, when policymakers are widely expected to cut their short-term rate to about 4.1 per cent from 4.3 per cent. The Fed is under relentless pressure from President Donald Trump to cut rates. At the same time, stubborn inflation while the job market is weakening is difficult for the central bank because they are diverging trends that require polar reactions from Fed policymakers to address.