American consumers absorbed another month of stubborn inflation in August, as gasoline prices surged and the annual rate held at 3.4%, handing the Federal Reserve a difficult choice days before its September policy meeting.
The Bureau of Labor Statistics reported Friday that the consumer price index rose a seasonally adjusted 0.4% for the month, matching the Dow Jones consensus. The 12-month increase held at 3.4%, unchanged from July. Both headline readings landed where economists expected, but the details underneath were less comforting. Core CPI, which strips out volatile food and energy prices, posted a 0.3% monthly gain, one-tenth of a point above the forecast, with the core annual rate at 2.4%.
Gasoline was the engine of the headline number. The gasoline index rose 3.9% in August alone, accounting for more than a third of the overall monthly increase. The broader energy index climbed 2.1% for the month and was up 16.3% from a year ago, with gasoline up 27.4% and fuel oil surging 52% on a 12-month basis. Diesel hit a new all-time high of more than $6 a gallon on average on Friday, according to the BBC. The spike has been driven by higher global oil prices tied to supply disruptions from the US-Iran war, with benchmark Brent crude hovering above $100 a barrel.
Fuel costs ripple through the economy
Higher oil prices do more than raise pump costs. They make transporting goods more expensive, and those costs can be passed to consumers through steeper prices for food and other staples. Jamie Hagen, president of Hell Bent Xpress, a family-owned trucking company in South Dakota, told the BBC’s World Business Report podcast that higher oil prices were hurting his business. “I’ve already invested in new equipment. We thought the economy was gonna start humming and now everybody’s paused. Like someone turned the faucet off,” Hagen said. “The calls aren’t coming in, the freight is slowing down drastically because there’s just no money left for it. People aren’t buying things and shippers aren’t making things.”
Wages are also falling behind. Separate figures showed real average hourly earnings fell by 0.3% over the past year, meaning paychecks are not keeping pace with the cost of living. The University of Michigan’s consumer sentiment index dropped by almost four points to 47.8 this month, down from 51.7 in August, marking the second consecutive month of declines. Surveys of Consumers director Joanne Hsu said that Democrats and Republicans alike posted sizable declines, while independents were little changed. Overall sentiment is now 16% below February, prior to the start of the Iran conflict, and 13% lower than a year ago.
Food prices edged 0.1% higher as food at home costs held flat, and the food index accelerated 2.7% annually. Shelter costs rose 0.3%, reversing a moderation seen over the prior two months. Transportation services increased 0.5%, used cars and trucks rose 0.4%, and new vehicle prices were up 0.3%. Motor vehicle insurance fell 0.8%, and tariff-sensitive apparel prices were flat. Among grocery items, the eggs index rose 2.9%, dairy and related products increased 0.3%, and fruits and vegetable prices fell 0.4%. The lettuce index continued its decline, falling 6.2% in August after dropping 16.4% in July.
Markets bet heavily on a rate increase
The report is the final major inflation indicator the Fed will see before its policy meeting on Sept. 15 and 16, concluding Wednesday with a vote on the key interest rate. The fed funds rate has sat between 3.5% and 3.75% for all of 2026, left on hold for five consecutive meetings. That pause now looks likely to end. According to CME Group’s FedWatch tracker, odds for a quarter-point hike jumped to nearly 90% after the CPI release, up from roughly 70% before the numbers landed. The BBC cited CME data showing 85% of traders betting on a raise. Skyler Weinand, chief investment officer at Regan Capital in Dallas, said inflation was “still too hot and the Federal Reserve’s hands are tied.” Weinand added that a rate hike next week is “all but assured” and that consumer prices are going in the wrong direction, remaining significantly higher than the Fed’s 2% target.
Stock market futures surged as oil prices plunged in morning trade, and the policy-sensitive 2-year Treasury note jumped 4.6 basis points to 4.594%. Janet Mui, head of market analysis at RBC Brewin Dolphin, said the likely interpretation was that a rate hike to restore inflation credibility would help anchor long-term inflation expectations and be seen as a positive development. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said there is no guarantee the Fed will hike but that it is hard to see how the central bank can justify leaving rates on hold.
Fed Chair Kevin Warsh has been tight-lipped on any specific decision but has repeatedly warned that the central bank’s focus should be on slowing price rises. At the Kansas City Fed’s annual symposium in Jackson Hole on Aug. 28, Warsh said inflation is running above the Fed’s 2 percent target and that the Fed’s predominant focus right now should be on prices. He also said that “accuracy in forecasting is still just an aspiration” for the Fed and that while summer PCE and CPI readings were better than expected, they did not tell him that underlying trends had meaningfully improved. Headline inflation measured by the PCE index is up 3.7% as of the most recent data.
Not everyone on the committee agrees. Governor Christopher Waller and New York Fed President John Williams entered the final stretch before the meeting more inclined to wait for remaining data. Waller said at a Reuters event on Sept. 3 that recent data suggested signs of disinflation and that if it continued, he would be inclined to support holding the rate at its current setting. He has also made personal criticisms of Warsh, including calling his advice “weird.” Kathy Bostjancic, chief economist at Nationwide, said Warsh and others signaled that rates can remain on hold only if disinflation continues, and Friday’s report did not deliver that. Jon Butcher, senior US economist at Aberdeen, said the jump in monthly core inflation removed the main obstruction to a rate rise, because price data had been showing a disinflationary trend that no longer holds.
President Donald Trump has said he does not think oil prices will come down until the war with Iran ends, which he expects to happen after November’s elections. Stephen Coltman, head of macro at 21shares, said the Fed would not normally look at rate increases given a core CPI of just 2.4%, but with the trend in “Supercore” excluding housing coming in hotter than expected and high oil prices boosting the headline, the committee will likely feel pressured to hike to show it is being responsive. “I think the Fed would have liked more time to see how recent increases in yields are affecting the economy, where consumers are already under pressure amid slowing wage growth and what feels like a tax increase from higher energy prices, but today’s number has likely forced their hand,” Coltman said.