Rising Jobless Claims Eclipse Inflation Data as Recession Fears Resurface

What to know:

• Investors shrugged off August's hotter-than-expected inflation data and instead zeroed in on surging initial jobless claims that point to a cooling labor market.
• The combination of rising prices and weakening job numbers is raising fresh concerns about stagflation — a rare and troubling economic scenario.
• Crypto markets initially dipped on the faster than expected inflation data, but quickly rebounded. Altcoins, including solana, XRP and dogecoin rose.

Markets are ignoring a hotter-than-expected inflation report and instead turning their attention to the latest signs that the U.S. labor market is faltering — a shift in focus that points to growing concern about a deeper economic slowdown.

Consumer prices rose a bit more than expected August, according to CPI data released Thursday by the U.S. Bureau of Labor Statistics. Both the headline rate of 2.9% and the core rate of 3.1% remain solidly higher than the Federal Reserve's 2% target. Normally, that would suggest the U.S. central bank should hold off on interest rate cuts.

But investors barely flinched at the data and instead focused what typically is the lesser-followed weekly initial jobless claims from the Department of Labor. That data showed claims soaring to 263,000 last week — the highest in nearly four years and up from 236,000 the previous week and 235,000 forecast. That focus was reflected in bond yields, with the 10-year Treasury yield sliding five basis points to below 4% for the first time since the April tariff panic tanked global equity markets.

“Evidence of a slowdown in the U.S. is now appearing in the hard data; it’s no longer just in the sentiment surveys,” said Brian Coulton, chief economist at Fitch.

As for the real economy, today’s numbers offer a troubling glimpse into something the U.S. central bank has been working hard to avoid: stagflation. This economic condition, defined by the simultaneous occurrence of high inflation and stagnant growth, is rare and difficult to fix. For policymakers, it’s a catch-22.

Cutting interest rates to stimulate growth risks inflaming inflation. But failure to ease monetary policy while the employment situation deteriorates isn't a much better alternative./p>

For now, traders are betting that the Fed will lean toward protecting growth over stamping out inflation, with odds pointing to a rate cut next week as a near certainty. Today’s data, however, suggests that the balance is becoming harder to manage and the path ahead may be more complicated than the market is pricing in.

“It's going to be a rough few months ahead as the tariffs impacts work their way through the economy," said Heather Long, chief economist at Navy Federal Credit Union. "Americans will experience higher prices and (likely) more layoffs.”