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- US headline CPI rose 0.4% MoM in August, while core inflation increased by a stronger-than-expected 0.3%.
- Energy drove much of the increase, with gasoline prices climbing 3.9% MoM and 27.4% YoY.
- Markets raised the probability of a 25-basis-point Fed hike to almost 90% ahead of the September 15–16 meeting.
US inflation regained momentum in August, strengthening expectations that the Federal Reserve will raise interest rates this week.
Headline inflation matched forecasts, but a stronger monthly core reading suggested that underlying price pressures had not disappeared. Markets responded by lifting the probability of a 25-basis-point hike to almost 90%, from around 70% before the report. ⁽¹⁾
Energy Costs Drive the Increase
Headline CPI rose 0.4% MoM, while the annual rate held at 3.4%, with both figures matching analysts’ expectations. Core CPI, however, rose 0.3% MoM, above the 0.2% forecast, while the annual rate eased to 2.4% from 2.5% in July. ⁽²⁾
Gasoline was the biggest driver behind August’s inflation report, rising 3.9% MoM and 27.4% YoY. The broader energy index gained 2.1% in August and stood 16.3% higher than a year ago, as tensions in the Middle East kept crude oil prices elevated. Fuel oil recorded an even sharper increase, rising 10.1% in August and 52% over the past year. ⁽³⁾
Energy pressure has continued since the August CPI data were collected. Brent crude traded around $107 per barrel, while the US national average for diesel rose above $6 per gallon for the first time in history. ⁽⁴⁾
Higher energy costs rarely remain confined to the gas station. Rising fuel prices can feed into freight, airfares and production costs, eventually affecting prices across the broader economy.
Grocery Prices Remain Stable
Food prices rose 2.7% YoY and climbed only 0.1% MoM, while grocery prices remained flat. Egg prices moved 2.9% higher, alongside small increases in dairy products and nonalcoholic beverages. However, lower fruit and vegetable prices helped contain the overall increase. ⁽⁵⁾
Although food inflation remained below annual wage growth of 3.1%, overall inflation of 3.4% continued to outpace earnings, maintaining pressure on household purchasing power. ⁽⁶⁾
Housing, Phones, and Travel Add Pressure
Shelter costs increased 0.3% in August following two months of softer readings, while rents rose 0.2%. ⁽⁷⁾
Wireless phone services jumped 5.9%, reportedly adding around 0.1 percentage point to monthly core inflation. The unusual increase may represent a temporary price adjustment, but it was large enough to push the core reading above expectations. ⁽⁸⁾
Travel costs also increased. Airfares climbed 2.7% as fuel costs rose, while hotel rates, measured through lodging away from home, rebounded by 2.4%. Meanwhile, medical-care costs declined 0.2% and motor-vehicle insurance prices fell 0.8%, partially offsetting increases elsewhere. ⁽⁹⁾
Consumers Feel the Squeeze of Higher Prices
Consumers are feeling the pain of higher prices, according to the University of Michigan’s consumer sentiment index, falling from 51.7 to 47.8 in September, as households are becoming more concerned about their finances and the economic outlook. ⁽¹⁰⁾
Higher fuel prices and persistent inflation have weighed on household budgets, while consumers have also raised their expectations for both near-term and longer-term inflation.
What It Means for the Fed
Inflation remains well above the Fed’s 2% target, and a rate pause is now harder to justify due to the combination of high consumer and producer prices.
The Fed Funds Rate has remained within the 3.50%-3.75% range since the start of the year, with the latest inflation figures reinforcing the case for higher rates.
Support for an immediate increase is not unanimous. Before the CPI report, Fed Governor Christopher Waller said he could support holding rates if inflation continued to improve, but would consider a hike if August inflation came in hot.
The FOMC meets on September 15–16, with its decision due Wednesday. Beyond the rate announcement, markets will focus on whether policymakers view a potential increase as a one-off response to renewed inflation or the beginning of a broader tightening cycle.
