The Headline Numbers
| Metric | Reading | Expectation |
|---|---|---|
| Overall CPI (YoY) | **3.4%** (flat vs. July) | 3.4% ✓ |
| Core CPI (YoY, ex food/energy) | **2.4%** | 2.4% ✓ |
| Core CPI (MoM) | **0.3%** — too hot | 0.2% ✗ |
| Core PCE (est.) | ~ MoM / ~3.4% YoY | — |
The monthly core reading broke two months of encouraging data that had supported the Fed's forecast that tariff-driven inflation would fade in H2 2026.
The Fed: A Hike Is Now Priced In
- **Rate-hike odds jumped to ~85%** (from ~70%) for next week's meeting, per interest-rate futures.
- The Fed has been **sharply divided** — three officials dissented in favor of a hike in July.
- Complication: **crude oil surged past $99/barrel** (vs. $85.76 at end of August) amid the Iran war's energy shock.
- Official PCE data won't be published until the end of September, but CPI-based estimates give policymakers enough to act on.
> *"If you don't raise rates now you better have a damn good story on why you didn't."* — Omair Sharif, Inflation Insights
Why Inflation Won't Fade on Its Own
1. **Energy spillover** — Diesel hit a record **$6.06/gallon** (vs. $3.71 a year ago), raising transport costs that get passed to consumers.
2. **Tariffs** — The Canada trade conflict makes tariff-driven price increases more protracted.
3. **AI build-out** — Still accelerating, adding demand pressure.
The Expectations Risk (The Big Worry)
- **Michigan consumer sentiment fell to 47.8** — potentially the second-lowest reading in the survey's history; mentions of gas prices and tariffs are spiking.
- **1-year inflation expectations jumped to 4.6%** (from 4.0%).
- **5-year expectations rose only slightly to 3.4%** (from 3.3%) — elevated vs. pre-pandemic, but roughly 1990s levels.
- Research (Malmendier & Nagel): expectations stayed anchored in 2021–22 because decades of low inflation conditioned consumers to view the spike as temporary. **A second bout of inflation could de-anchor expectations more decisively** — workers demand bigger raises, businesses pre-emptively raise prices.
Inflation that was supposed to cool (it stood at 2.4% in January) has stalled at 3.4% thanks to the Iran war's energy shock. A 0.3% monthly core reading puts a Fed rate increase on autopilot for next week. The longer inflation stays elevated, the greater the risk expectations un-anchor — meaning the cost of waiting grows by the month.
Consumer Price Index: Not nearly enough progress
The headline Consumer Price Index (CPI) was in line with expectations, landing at 0.4% from July, and 3.4% over the past 12 months. Core CPI was a little higher than expected at 0.3% (0.2% projected), but over the past year, still rising in line with expectations of 2.4%.Unsurprisingly, energy prices were a major contributor to the headline increase, with energy commodities, which include gasoline and fuel oils, rising 4.2% month-over-month. Energy services like electricity and gas utility services have fallen in price since July.
While the continued increase in gas and other energy prices was expected, price hikes are bleeding into other categories. The impact of higher diesel and jet fuel prices will affect travel and shipping costs on just about everything.
Shelter rose 0.3% since July, the largest monthly increase since May, and due to its considerable weighting in the index, was a major factor in the higher-than-expected core CPI increase. Services overall are still running at 3% annual inflation and are going to make the upcoming Federal Reserve decision a tricky one.
The Federal Reserve is in a very difficult position because it cannot ignore an annual inflation rate that is stuck, and so little progress is being made back to the 2% target. The trajectory of inflation needs to be moving measurably lower, and the protracted conflict in the Middle East is only one reason it isn’t. The broad resilience of the economy spurred on by the massive AI buildout will push up inflation over the next few years.
As uncomfortable as it may be, the Fed may have to make a show of force in the face of rapidly accelerating inflation. However, doing so next week risks blowback from the administration. Acting or failing to act for political reasons, or even to avoid the appearance of politics, makes this all the more difficult.
Both headline and core CPI showed firmer inflation in August. We should expect more bad news on inflation in September, as oil prices topped $100 per barrel this week.
Furthermore, with no clear resolution to the energy disruption in the near term, inflation will remain much harder to bring back down to the target level.
While a 25-basis-point hike in September might not look like much, it would help signal that the Federal Reserve is determined to bring inflation down to 2%. The central bank’s credibility took a significant hit in July after it failed to provide a clear message on inflation.