Inflation accelerated in August, although it’s unlikely to derail expectations for the Federal Reserve to cut rates at its meeting next week. But analysts said that a 25 basis-point decrease, rather than a 50-bps cut, appears far more likely.

In line with expectations, the Consumer Price Index (CPI) rose 2.9% year over year in August, up from 2.7% in July, the U.S. Bureau of Labor Statistics reported on Thursday. On a monthly basis, inflation climbed 0.4%, compared to 0.2% the prior month.

Core inflation — which excludes food and energy prices — held steady at 3.1% annually, with food (+0.5%) and energy (+0.7%) posting large monthly gains. Shelter costs, up 3.6% year over year, continued to cool but still accounted for the largest share of the overall monthly increase at 0.4%. 

“The latest data likely sets up the Fed to move forward with a conservative 25-basis point cut at next week’s meeting, while offering little in the way of justification for a more aggressive 50-basis point move,” Sam Williamson, senior economist at First American, said in a statement. 

Bank of America analysts said the August CPI inflation came in a “little hotter” than the 0.3% they expected, but added it doesn’t alter their base case of two 25-bps cuts by the Fed in September and December. 

“If PCE inflation is in line with our projection, however, the risks of another cut in October would increase. Ultimately, we think the October decision will depend more on the labor data,” they wrote in a report.

Markets initially priced in faster cuts Thursday morning after a spike in jobless claims, though analysts cautioned that the jump likely stemmed from seasonal distortions around Labor Day and a surge in claims from Texas.

Realtor.com senior economist Jake Krimmel said the uptick in headline inflation was driven by higher energy and food costs, which may reflect the impact of new tariffs. Other tariff-sensitive categories, such as cars and home furnishings, also showed increased inflation.

“While it remains to be seen whether tariffs will result in a one-time jump or a more recurrent increase in price levels, their staggered rollout suggests effects will be felt across multiple reports rather than in a single month, making inflation data harder to interpret in real time,” Krimmel said in a statement. 

Monetary policy watchers are coalescing around expectations of a 25-bps cut after the Fed’s Sept. 17 meeting, with about 89% of market participants pricing in that outcome. The remainder are betting on a 50-bps cut, according to the CME Group‘s FedWatch tool. 

But “the combination of firmer inflation and weaker labor market data complicates the Fed’s picture going forward,” Krimmel said. “With inflation above target and still rising, plus jobs momentum slipping, the Fed faces a difficult balancing act on both sides of its dual mandate,” he added.

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