U.S. consumer prices likely accelerated in August after two months of modest gains, driven by a rebound in gasoline costs that has rekindled concerns about persistent inflation just days before the Federal Reserve’s September policy meeting. Economists surveyed by Reuters expect the Labor Department’s Consumer Price Index to rise 0.4% for the month, up sharply from July’s 0.1% increase, with the annual inflation rate holding steady at 3.4%. Gasoline prices averaged $4.192 per gallon in August, up from $4.064 in July, as oil prices climbed back above $100 per barrel amid the ongoing war with Iran and supply disruptions that show no sign of abating.
The August CPI report, due Friday, will be the last major inflation reading before the Fed convenes on September 15–16. Markets are already pricing in a roughly 70% chance of a 25 basis point rate hike, highlighting how quickly expectations have shifted as energy costs and other inflation pressures have returned.
Gasoline Rebound Raises Fresh Inflation Concerns
The inflation picture has shifted dramatically since mid summer. In July, cooler energy prices and a 0.8% drop in prescription drug costs helped keep headline inflation tame, while core consumer prices, which exclude food and energy, rose a modest 0.2%. But August brought renewed pressure from multiple fronts as gasoline prices reversed course amid escalating Middle East tensions.
Economists also warn that tariffs, most recently imposed on Canada, are proving more enduring than initially expected. Joe Brusuelas, chief economist at RSM, said factors previously considered temporary now appear increasingly persistent, with the energy shock continuing to affect prices while tariffs are having a longer lasting impact than initially anticipated.
The Federal Reserve therefore finds itself in an increasingly difficult position. After holding rates steady at 3.50%–3.75% in July, the central bank appeared to be leaning toward patience, with Governor Christopher Waller indicating he would favor keeping rates unchanged if data confirmed that inflation pressures were cooling.
However, a robust August employment report, combined with the gasoline rebound and strong producer price data released Thursday, has reset market expectations. CME’s FedWatch tool now shows traders assigning a roughly 70% probability to a quarter point hike, compared with expectations of a hold just weeks ago. Fed Chair Kevin Warsh, who took the helm earlier this year, warned last month that the central bank would “have work to do” if policymakers failed to gain confidence that inflation was heading toward the 2% target.
Political pressure is also complicating the Fed’s calculations. President Donald Trump has publicly demanded rate cuts, including a social media post last week calling on the central bank to lower rates. Economists have blamed the president’s rhetoric for a surge in long term Treasury yields, while some analysts believe the Fed may feel compelled to raise rates to reinforce its independence from political interference.
John Ryding, chief economic advisor at Brean Capital, said a September 16 rate hike could serve as a strong statement underscoring the central bank’s independence. He added that, without the August inflation data, he expected the Fed to raise rates.
Core Inflation and the Fed’s September Decision
Beneath the headline numbers, the details of the August report will matter greatly for the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures price index. Core CPI is expected to rise 0.2% on the month, with the annual rate easing slightly to 2.4% from July’s 2.5%.
Economists estimate that August core PCE inflation could rise between 0.15% and 0.28%, with the year over year rate remaining around 3.2% to 3.3%, well above the central bank’s target. Higher jet fuel costs are expected to keep airfares elevated, while food prices are forecast to post a moderate monthly increase, keeping year over year food inflation near 3.0%.
The August PCE report will also include methodological changes that some economists say could lower the core inflation reading by a few basis points. However, the impact is expected to be marginal compared with the broader pressure created by rising energy costs.
The stakes extend well beyond monetary policy. Frustration over higher prices, particularly for gasoline and food, has eroded President Trump’s approval ratings and threatens Republican control of Congress in November’s midterm elections. With oil prices above $100 per barrel, the war with Iran continuing into its seventh month and tariffs continuing to ripple through supply chains, the inflation outlook has darkened just as the Fed prepares for a potentially consequential decision.
Whether the August data confirms the market’s hawkish expectations or provides an unexpected measure of relief could influence the trajectory of interest rates and shape perceptions of the Federal Reserve’s credibility. The decision will also test how the central bank balances inflation risks, economic growth and its independence in an increasingly polarized political environment.
