Inflation Runs Hot in August
US consumer prices continued to climb in August, with the Bureau of Labor Statistics reporting Friday that the consumer price index rose 0.4% for the month and 3.4% over the past 12 months. Both figures matched the Dow Jones consensus. Core inflation, which strips out volatile food and energy costs, increased 0.3% monthly, a tenth of a percentage point above forecasts, while the annual core rate came in at 2.4%, in line with estimates. The report is the last major inflation reading before the Federal Reserve concludes its policy meeting next Wednesday.[S1][S3]
Energy was the main driver of the monthly increase. Gasoline jumped 3.9% in August and made up over a third of the total gain, as Middle East tensions weighed on oil markets. The overall energy index climbed 2.1% for the month and 16.3% year over year. Over 12 months, gasoline rose 27.4% and fuel oil soared 52%. Food prices edged up 0.1% monthly and 2.7% annually, with groceries flat. Shelter rose 0.3%, transportation services 0.5%, and used cars and trucks 0.4%. Apparel was unchanged, while motor vehicle insurance dropped 0.8%.[S1][S3][S4]
Markets Bet on a Fed Hike
Traders responded to the inflation data by sharply increasing bets that the Federal Open Market Committee will raise its benchmark interest rate by a quarter percentage point at its meeting next week. Odds jumped to nearly 90% from under 70% before the release, according to CME Group's FedWatch tracker of fed funds futures. The fed funds rate currently sits in a range of 3.5% to 3.75%, where it has been throughout 2026. A follow-on hike in October also gained traction, with odds rising to almost 60%.[S1][S4]
Fed Chairman Kevin Warsh has stressed his commitment to bringing inflation back to the central bank's 2% target, saying recently that if the numbers do not improve, there is work to do. His remarks were widely read as favoring a rate increase, though several key officials have recently urged patience. Analysts said the August report did not show the disinflation needed to keep rates on hold. Skyler Weinand, chief investment officer at Regan Capital, said a rate hike next week is all but assured, while Kathy Bostjancic of Nationwide noted that renewed increases in oil, gasoline and diesel prices could spill over into other goods and services and inflation expectations.[S1][S3]
Consumer Costs and Market Reaction
The inflation data arrived as consumers already contend with high borrowing costs. On Thursday, the average 30-year fixed mortgage rate climbed past 7%, pushed by a jump in the 10-year Treasury yield. The national average gasoline price is still more than 40% higher since the US and Israel began the Iran war on February 28. Diesel hit a record $6 a gallon Friday, and airline fares increased 2.7% in August and 23.4% over the year. Separate BLS data showed real average hourly earnings for US workers fell 0.1% from July.[S3][S4]
Even with the strong inflation reading, stocks gained Friday after four consecutive down days, as traders zeroed in on declining oil prices. The Dow Jones Industrial Average climbed 578 points, or 1.1%, by around 10:00 a.m. ET, while the S&P 500 and Nasdaq added 1.1% and 1.2%. Brent crude dropped 3.2% to $104.14 a barrel. Treasury yields were mixed: the policy-sensitive 2-year note rose 4.6 basis points to 4.594%, while longer-term rates eased slightly following a sharp rally that had driven the 10-year yield close to 5%.[S1][S3]
