Jobs or inflation? Inflation or jobs? Figuring out which is ringing alarm bells louder this year hasn’t been easy.

The job market is wobbling:

• According to the Bureau of Labor Statistics, the U.S. unemployment rate has climbed to 4.3% from 3.4% in 2023 — the highest level since 2021.
• According to Challenger, Gray, & Christmas, the total number of layoffs in 2025 through August was 892,362, up 66% year over year.
• There were 7.2 million open, unfilled jobs nationwide in July, down from more than 12 million in 2022.

And Consumer Price Index (CPI) inflation is increasing:

• July: 2.7%
• June: 2.7%
• May: 2.4%
• April: 2.3%

Neither is heading in the right direction, which has boxed the Federal Reserve in, forcing it to the sidelines and risking recession or stagflation, a period of slow GDP growth and higher consumer prices.

Today, the jobs data has most on Wall Street expecting the Fed to finally come off the sidelines and cut rates at its next meeting on September 17.

Related: Goldman Sachs revamps S&P 500 target for 2026

However, that could change if the August CPI report, due later this week, on Sept. 11, shows inflation continuing to march upwards, prompting Wall Street researchers to update their outlooks.

Among them is Bank of America, one of the country’s most prominent market research firms, with roots back to 1904. On Sept. 6, its economists announced their CPI prediction ahead of this week’s report.  

Sidelined Fed risks falling behind the curve

The Fed’s job isn’t easy. Its mandate: low inflation and low unemployment.

Walking the tightrope between these competing goals is anything but simple. Higher rates slow inflation but cause unemployment, while lower rates have the opposite effect.

As a result, Fed Chairman Jerome Powell finds himself in a corner this year. If he cuts rates, like he did at the end of 2024, he risks fueling inflationary fires even as the full impact of tariffs hits consumer prices — something that could crimp wallets and send the economy reeling.

If he holds rates steady, however, he risks falling behind the curve on monetary policy, risking runaway unemployment, stagflation, or worse, an outright recession.

Bank of America’s CPI forecast is worrisome

The Fed’s job would be simpler if not for tariffs. President Donald Trump has made tariffs a cornerstone of his administration, arguing they’ll respark U.S. manufacturing activity.

Maybe so, but higher import prices are problematic for inflation. Somebody has to pay, so vendors, companies, or consumers are taking a hit.

Related: Bank of America announces huge shift in Fed rate cut forecast

We’re already seeing that play out with CPI inflation climbing to 2.7% in July from 2.3% in April, when some announced tariffs began kicking in. As each month has passed, existing pre-tariff inventory has dwindled, increasing the pressure on companies to either pass along some of the costs to buyers or see their profit shrink.

Unfortunately, the situation didn’t improve in August, according to Bank of America’s economists.

In a research note shared with TheStreet, the bank’s analysts painted a stark picture:

“We forecast headline and core CPI rose by 0.3% m/m in July owing to rising energy prices, steady tariff-driven goods inflation, and firm non-housing services…we expect y/y headline CPI should rise from 2.7% to 2.9%, its highest since last July.”

If Bank of America is correct, the year-over-year increase suggests that already cash-strapped consumers may need to rethink their spending once again, and the Fed may have to reconsider any plans to cut interest rates dramatically through the end of 2025, especially since tariffs’ impact isn’t disappearing anytime soon.

“Look for tariffs to continue to be slowly passed through to consumers. Tariffs should contribute to ongoing price increases in household furnishings, apparel, and recreation commodities. We expect tariffs to remain a source of goods price inflation over the next few quarters.”

Bank of America isn’t alone in thinking that August’s CPI inflation will be higher than July’s. The Wall Street consensus estimate also expects headline CPI to rise 2.9% year over year. If you strip out volatile food and energy, core CPI is predicted to be 3.1%, in line with July’s increase.

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The CPI report isn’t the only inflation data that helps decide whether the Fed lowers rates. It also considers PCE inflation data. However, the August PCE inflation report will be released on Sept. 26, after the Fed meeting, increasing the importance of this week’s CPI data.

Unfortunately, Bank of America has bad news regarding PCE inflation, too. 

“Our preliminary estimate for core PCE inflation in July is 0.27% m/m. If correct, core PCE would increase to 3.0% y/y in August,” wrote the economists.

If so, that would mark an increase from 2.9% in July.

Related: Here’s how stocks react to Fed interest rate cuts