The August headline CPI reading was in line with expectations, and kept the annual figure steady at 3.4%. The larger surprise, however, was the hotter-than-expected core inflation reading. Though the annual rate slowed modestly to 2.4%, the 0.3% monthly increase in Core CPI broke above the 0.2% threshold broadly perceived as a benchmark for progress toward price stability. With ongoing geopolitical conflicts keeping energy prices elevated, renewed trade tensions, and rising costs from the AI investment surge, upside inflation risks persist, complicating policymakers’ efforts to achieve meaningful price stability. A Federal Reserve rate hike is in the cards for next week.

• Headline inflation rose 0.4% in August, in line with expectations, yet marked a meaningful acceleration from last month’s benign reading due to higher energy prices. While the annual rate was unchanged at 3.4%, and second-round inflation effects from the Middle East conflict still appear limited, the ongoing geopolitical conflicts suggest the risks of further supply chain disruptions and broader inflation pressures cannot be ruled out. 
• Resurgent energy prices followed a climb in crude oil, which rose from the high-$70s per barrel level in early August to top $90 per barrel by the end of the month. Concerningly, Brent oil prices have ground higher since and now sit well above $100 per barrel – nearly 50% higher than the lows reached during the summer U.S.-Iran ceasefire. Ongoing geopolitical tensions continue to exert upward pressure, suggesting energy price increases will persist. Moreover, the duration and magnitude of the increase will likely determine whether there is broader spillover effect. 
• Food inflation remained contained in August. Similar to July, the modest increase in food was largely driven by food away from home. Meanwhile, food at home was mostly unchanged following broad price declines in July. Four of the six major categories posted monthly increases, though these were offset by a meaningful decline in fruits and vegetables. While food inflation trends remain encouraging, upside risks persist due to ongoing fertilizer trade flow disruptions in the Strait of Hormuz and the El Niño weather pattern, which threatens global food commodity prices. 
• Core inflation, which excludes food and energy, was the real surprise today. The index rose 0.3% for the month, hotter than expected and a tick up from July. While the annual rate slowed to 2.4% from 2.5%, the monthly uptick broke above the threshold broadly perceived as progress toward price stability. The 0.3% rise in shelter costs was less tame than the benign June and July readings, which had previously offset broader inflationary pressures. Still, the annual reading illustrates ongoing slowing in pace, alongside a soft housing market. Beyond core shelter costs, education, transport services, and autos provided an additional lift, though these were partially offset by declines in medical care services and commodities, and vehicle insurance.
• Fed’s preferred supercore inflation measure rose 0.5%, pushing the annual rate up to 3.0% from 2.8%. This measure stood out among August’s hotter inflation data, underscoring that inflation remains sticky despite softer wage growth.