Inflation rose slightly in August, according to the Bureau of Labor Statistics (BLS). The Consumer Price Index (CPI) rose 0.4 percent last month, up from 0.2 percent in July. On a year-over-year basis, headline inflation ticked up to 2.9 percent, compared with 2.7 percent in the prior month.
Core inflation, which excludes volatile food and energy prices, rose 0.3 percent in August, as it did in July. It remained steady at 3.1 percent on a year-over-year basis.
The uptick in headline CPI largely reflected rising shelter, energy, and food prices. Shelter, which accounts for about one-third of the index, rose 0.4 percent and was, according to the BLS, “the largest factor in the all items monthly increase.” Energy prices rose 0.7 percent, driven by a 1.9 percent increase in gas prices. Food prices rose 0.5 percent, with food at home rising by 0.6 percent and food away from home rising by 0.3 percent.
Core CPI held steady, in contrast, because those categories that saw higher prices (e.g., shelter, airline fares, and vehicles) were offset by other categories where prices fell (e.g., medical care and recreation). Used cars and trucks and transportation services posted the largest increase, up 1.0 percent, followed by apparel, which rose 0.5 percent. Prices also increased for airline fares and new vehicles, while recreation and communication services declined. In short, categories excluded from core inflation pulled the overall index up.
Given the ongoing uncertainty about the effect of tariffs on consumer prices, a 12-month average may obscure their effect. A better gauge is the recent three-month trend. Inflation averaged 0.3 percent per month in June (0.3 percent), July (0.2 percent), and August (0.4 percent), which is equivalent to a 3.6 percent annual rate. That is well above the year-over-year figure of 2.9 percent.
Recent core CPI data tell a similar story. Core prices rose 0.2 percent in June, 0.3 percent in July, and 0.3 percent in August — an average monthly rise of 0.3 percent, which is equivalent to a 3.3 percent annual rate. That’s higher than the year-over-year core figure of 3.1 percent, meaning inflation has risen in recent months compared to its year-over-year pace, as well.
Although the Fed officially targets the personal consumption expenditures price index (PCEPI), CPI data provide timely and relevant information for policymakers. The two measures generally track each other closely, though CPI tends to overstate inflation relative to the PCEPI. That makes the latest CPI readings a useful (if slightly higher) measure for Fed officials — and, hence, for determining how those Fed officials will likely conduct policy.
The observed uptick in CPI inflation is not necessarily unexpected. The consensus view is that tariffs are likely to result in a one-time increase in the price level. If Fed officials accept that view, they will likely go through with the widely expected rate cut next week, despite both headline and core inflation exceeding the Fed’s 2 percent target.
According to the CME Group’s FedWatch tool, the implied odds of a September rate cut are 100 percent. Unsurprisingly, today’s CPI data appears to have increased the likelihood of a 25-basis-point cut while reducing the chance of a 50-basis-point cut. The odds of a 25-basis-point cut rose from 91.1 percent to 92.8 percent over the last day. The odds of a 50-basis-point cut declined from 8.9 percent to 7.2 percent. The movement in the implied odds reflects minor revisions in beliefs about the extent to which inflation will be an ongoing concern.
The Fed was slow to act when inflation first accelerated. It should avoid making the opposite mistake now. The latest uptick in prices likely reflects temporary, tariff-driven increases rather than a resurgence of underlying inflation. Meanwhile, the effects of past tightening are still working their way through the economy, and policy is already highly restrictive. Waiting too long to cut could mean falling behind the curve again — this time by letting restrictive policy push the economy into a preventable recession. In the words of Governor Waller, when it comes to rate cuts, it’s time to “get on with it.”