WASHINGTON (Reuters) - U.S. consumer prices increased by the most in seven months in August amid higher costs for housing and food, but a surge in first-time applications for unemployment aid last week kept the Federal Reserve on track to cut interest rates next Wednesday.

The larger-than-expected rise in the Consumer Price Index reported by the Labor Department on Thursday resulted in the biggest year-on-year increase in inflation since January. The combination of higher inflation and deteriorating labor market conditions could fuel fears of stagflation.

August could be the start of a long-anticipated upward trend in inflation as businesses pass on higher costs from President Donald Trump's sweeping tariffs to consumers.

"While the CPI report is a tad hotter than expected, it will not give the Fed a moment of hesitation when they announce a rate cut next week," said Seema Shah, chief global strategist at Principal Asset Management.

The CPI rose 0.4% last month, the biggest gain since January, after increasing 0.2% in July, the Labor Department's Bureau of Labor Statistics said. The CPI was driven by a 0.4% jump in the cost of shelter, which includes rents and hotel rooms. Food prices increased 0.5%, with the cost of food consumed at home soaring 0.6%.

Tariffs have boosted the price of coffee. Beef prices have also surged, a combination of import duties and past droughts that decimated the national herd. 

Labor shortages at farms as the Trump administration rounds up undocumented migrants for deportation were also adding to higher food prices, economists said.

In the 12 months through August, the CPI advanced 2.9%, the largest increase since January, after climbing 2.7% in July.

Economists polled by Reuters had forecast consumer prices would rise 0.3% in August and increase 2.9% on a year-over-year basis.

The pass-through from Trump's tariffs had been gradual, but businesses have now depleted their pre-tariff inventories. Business surveys have for some time been signaling imminent price increases.

"The evidence is overwhelming that more tariff-related inflation is coming, though it may still be several months before it passes through fully," said Stephen Stanley, chief economist at Santander U.S. Capital Markets.

THE INCREASE IN INFLATION WAS BROAD

Excluding the volatile food and energy components, the CPI rose 0.3% after a similar gain in July. The so-called core CPI inflation was lifted by higher housing costs as well as airline fares. Owners' equivalent rent rose 0.4%, while hotel and motel room prices surged 2.3%. Airline fares soared 5.9% and used cars and trucks prices rose 1.0%.

In the 12 months through August, the core CPI inflation increased 3.1%, matching July's rise. 

The U.S. central bank, which tracks the Personal Consumption Expenditures (PCE) price indexes for its 2% inflation target, is expected to cut rates at its policy meeting next Wednesday. A quarter-percentage-point reduction has been fully priced in. The Fed paused its easing cycle in January because of uncertainty over the inflationary impact of import duties.

Prior to the CPI data, economists estimated core PCE inflation increased 0.3% in August for a third consecutive month, which would translate to an annual increase of 3.1%. That would be an acceleration from a 2.9% increase in July.

The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

In a separate report, the Labor Department said initial claims for state unemployment benefits jumped 27,000 to a seasonally adjusted 263,000 for the week ended September 6, the highest level since October 2021. Economists polled by Reuters had forecast 235,000 claims for the latest week.

The government said this week that nonfarm payrolls could have been overstated by 911,000 jobs in the 12 months through March. That followed the release last Friday of the monthly employment report, which showed job growth almost stalled in August and the economy shed jobs in June for the first time in four and a half years amid tariff uncertainty.

A survey from the New York Federal Reserve on Monday showed consumers' confidence of finding a job in August was the lowest since June 2013. The number of people receiving benefits after an initial week of aid was unchanged at 1.939 million during the week ending August 30, the claims report showed.