U.S. inflation outlook points to August CPI increase before Fed decision

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U.S. inflation outlook August CPI

Highlights

Economic forecasts predict August CPI will rise 0.4% month-on-month and 3.4% year-on-year, with gasoline averaging $4.192 a gallon.
Markets are pricing a 70% probability of a 25-basis-point Fed rate hike at the Sept. 15-16 meeting, given persistent inflation and recent strong employment data.
Rising oil and food prices, persistent tariffs, and political pressure from President Trump to cut rates are fueling higher Treasury yields and complicating Fed policy decisions.

August price pressures and policy timing

As reported by Reuters, economists expect the Labor Department's Consumer Price Index report on Friday to show headline inflation increased 0.4% in August after edging up 0.1% in July. In the 12 months through August, consumer inflation is forecast to rise 3.4%, matching July's annual gain, with higher gasoline prices driving much of the monthly increase.

Data from the U.S. Energy Information Administration show gasoline prices averaged $4.192 a gallon in August, up from $4.064 in July. The CPI report also follows strong readings in several components of the Producer Price Index released on Thursday that feed into the Personal Consumption Expenditures price indexes, the inflation measures the Fed tracks for its 2% target.

Excluding food and energy, core CPI is expected to increase 0.2% in August, unchanged from July. Economists say moderation in rents, apparel prices and new motor vehicle costs could help contain the core reading, though higher jet fuel prices likely keep airfares elevated.

In the 12 months through August, core CPI inflation is forecast to rise 2.4% after 2.5% in July. Following the PPI data, economists' estimates for August core PCE inflation range from a 0.15% gain to a 0.28% increase, after a 0.2% rise in July.

Market and political implications for the Fed

Expectations for firmer inflation add to the case for tighter monetary policy after last week's strong August employment report. Markets on Thursday price in about a 70% chance of a 25-basis-point increase at the Fed's Sept. 15-16 meeting, according to CME's FedWatch tool, with the benchmark overnight rate currently in a 3.50% to 3.75% range.

Fed Governor Christopher Waller says he is inclined to argue for keeping rates steady if incoming data confirm that inflation pressures are cooling, but rising oil prices above $100 a barrel complicate that view. Economists also point to tariffs on imports, including measures against Canada, as a factor that could keep price pressures broad and persistent.

Joe Brusuelas, chief economist at RSM, says factors once seen as temporary now appear more durable, with the energy shock showing no clear end. Higher prices for gasoline and food are also weighing on consumer sentiment and President Donald Trump's approval ratings ahead of the November midterm elections.

Trump is pressing the Fed to cut rates, writing on social media last week that he could halt trade with countries with which the U.S. has a deficit if rates are not lowered. Some economists argue that political pressure is contributing to higher long-term Treasury yields, while others expect the Fed to raise rates next Wednesday to reinforce its independence.

Our earlier coverage focused on the August U.S. Consumer Price Index as the final key inflation print before the Fed’s upcoming policy meeting, with forecasts pointing to 0.4% monthly inflation and a 3.4% annual rate. We also noted that hotter CPI components tied to PCE, alongside volatile energy prices, were pushing market pricing toward a quarter-point hike and keeping rate expectations highly sensitive to incoming data.

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